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Government intervention in the capital allocation process: Excess employment as an IPO selection rule in China

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  • Johansson, Anders C.
  • Luo, Danglun
  • Rickne, Johanna
  • Zheng, Wei

Abstract

We study the role of excessive 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' that have more excess employment – that is, firms that hire too many people – are more likely to be selected for an IPO. This correlation is stronger for the private sector than for the state sector, suggesting that stock market capital is used to direct capital flows to private firms that comply with politicians' preferred labor practices. A third set of results corroborates the inefficiency of this selection rule by showing that firms with more excess labor underperform after the IPO. We conclude that a political system known for its interventionistic government policies uses its influence over the stock market to signal preferred employment practices.

Suggested Citation

  • Johansson, Anders C. & Luo, Danglun & Rickne, Johanna & Zheng, Wei, 2017. "Government intervention in the capital allocation process: Excess employment as an IPO selection rule in China," China Economic Review, Elsevier, vol. 44(C), pages 271-281.
    • Handle: RePEc:eee:chieco:v:44:y:2017:i:c:p:271-281
    DOI: 10.1016/j.chieco.2017.05.002
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    10. Feng, Xunan & Johansson , Anders C. & Wang, Ying, 2018. "Strengthened State Capitalism: Nationalized Firms in China," Stockholm School of Economics Asia Working Paper Series 2018-51, Stockholm School of Economics, Stockholm China Economic Research Institute.
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    More about this item

    Keywords

    Local government; Initial public offering; Labor market; Excess labor; Capital allocation; China;
    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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