Politically connected CEOs, corporate governance, and Post-IPO performance of China's newly partially privatized firms

Joseph P.H. Fana, , , T.J. Wonga and Tianyu Zhangb

aThe Chinese University of Hong Kong, Shatin, N.T., Hong Kong
bCity University of Hong Kong, Kowloon, Hong Kong

Received 19 August 2005;  revised 31 January 2006;  accepted 6 March 2006.  Available online 24 January 2007.

Abstract
Almost 27% of the CEOs in a sample of 790 newly partially privatized firms in China are former or current government bureaucrats. Firms with politically connected CEOs underperform those without politically connected CEOs by almost 18% based on three-year post-IPO stock returns and have poorer three-year post-IPO earnings growth, sales growth, and change in returns on sales. The negative effect of the CEO's political ties also show up in the first-day stock return. Finally, firms led by politically connected CEOs are more likely to appoint other bureaucrats to the board of directors rather than directors with relevant professional backgrounds.
Keywords: Political connections; Corporate governance; IPO performance; Partial privatization; China
JEL classification codes: G34; L33; P31