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Government Intervention in the Capital Allocation Process: Firm Employment as an IPO Selection Rule in China

Author

Listed:
  • Johansson, Anders C.

    (Stockholm China Economic Research Institute)

  • Luo, Danglun

    (Lingnan College, Sun Yat-sen University)

  • Rickne, Johanna

    (Research Institute for Industrial Economics & Stockholm China Economic Research Institute, Stockholm School of Economics)

  • Zheng, Wei

    (Business School, Sun Yat-sen University)

Abstract

We study the role of local employment as a selection criterion for initial public offerings (IPOs) in China. Using a large dataset of firms that are eligible for a public offering, we find that firms' contributions to the local labor market increase the probability of an IPO event. Digging deeper into the mechanism, we find that the results hold for private firms but not for state-owned firms that, presumably, are already in compliance with the high employment levels preferred by local officials. We also uncover that firms which contribute more to employment receive more government bank loans in the period leading up to the IPO event. A final set of results sheds light on the economic ramifications of government involvement in the IPO selection process. We find that firms which contribute more to local employment underperform relative to other firms after going public. Our findings shed light on how a political system known for its interventionistic government policies affects behavior in the private sector.

Suggested Citation

  • Johansson, Anders C. & Luo, Danglun & Rickne, Johanna & Zheng, Wei, 2016. "Government Intervention in the Capital Allocation Process: Firm Employment as an IPO Selection Rule in China," Stockholm School of Economics Asia Working Paper Series 2016-40, Stockholm School of Economics, Stockholm China Economic Research Institute.
  • Handle: RePEc:hhs:hascer:2016-040
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    References listed on IDEAS

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    More about this item

    Keywords

    Local government; Initial public offering; Labor market; Employment; Capital allocation;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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