Scandinavian Working Papers in Economics

Stockholm School of Economics Asia Working Paper Series,
Stockholm School of Economics, Stockholm China Economic Research Institute

No 2016-40: Government Intervention in the Capital Allocation Process: Firm Employment as an IPO Selection Rule in China

Anders C. Johansson (), Danglun Luo , Johanna Rickne and Wei Zheng
Additional contact information
Anders C. Johansson: Stockholm China Economic Research Institute, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Danglun Luo: Lingnan College, Sun Yat-sen University
Johanna Rickne: Research Institute for Industrial Economics & Stockholm China Economic Research Institute, Stockholm School of Economics
Wei Zheng: 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.

Keywords: Local government; Initial public offering; Labor market; Employment; Capital allocation

JEL-codes: D72; E24; G32; G34

39 pages, December 1, 2016

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