Knut Wicksell Working Paper Series, Knut Wicksell Centre for Financial Studies, Lund University
Political Connections and Stock Liquidity: Political Network, Hierarchy and Intervention
Abstract: I measure the value of political connections through their
liquidity effect on privately controlled firms and state-owned enterprises
(SOEs) in China’s stock market over the period of 2003 to 2012. State
participation among the top ten shareholders is used as a criterion for
classifying a firm as “politically connected”. Using this criterion, I find
that politically connected firms are associated with higher liquidity,
which is manifested by tighter spreads, higher quoted depths, greater
trading activity, lower adverse selection spread components and a smaller
price impact. I further examine the effects of three dimensions of
political connections on liquidity: political network, hierarchy and
intervention. First, I determine that a greater political network results
in greater liquidity for both state-owned and privately controlled firms.
Second, SOEs that are centrally controlled possess higher liquidity than
those that are locally controlled. Third, greater political intervention
arising from direct government control impedes the positive impact of
political connections on liquidity.
Keywords: Political connections; Firm liquidity; Corporate governance; Firm value; Information asymmetries; Trading activity; (follow links to similar papers)
JEL-Codes: C23; G12; G18; G32; (follow links to similar papers)
50 pages, December 1, 2014
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