Political endorsement and political visit: new evidence of how governments influence capital markets
Governments participate in financial markets through various methods, such as issuing policies, providing subsidies or directly owning firms. This thesis examines the effects of two under-researched ways in which the government influences the market—political endorsement and political visits. Chapter 3 explores firms that are endorsed by the central government of China and finds that the government’s underlying motive for endorsing firms is its social goals rather than vested interests. Political endorsement is positively associated with market reactions, especially when firms are endorsed for their achievements and advanced operation. Moreover, political endorsement has significantly positive impact on firms’ operating performance, and the results are consistent after controlling for selection on observables through applying PSM methodology and controlling for selection on unobservables through applying treatment effects model with the instrumental variable technique, no matter which performance measurements are used. The positive effects are more salient for firms with weak pre-event performance, fewer connections, a greater dependence on external financing, and those located in places with better institutions. Moreover, the increase in subsidies, the reduction in cost of debts, and the improvement in investment efficiency are identified as three channels of value creation after political endorsement. In Chapter 4, another under-researched way in which government influences the market is examined —political visit. I examine the effects of political visits by Chinese state leaders based on a sample of firms that hosted political visits from 2009 to 2016. This paper first finds that representativeness, political connections and alignment with government goals are the three basic criteria for choosing firms to visit. Moreover, the results demonstrate that the positive market reactions to political visits vary according to the political power of different administrations and different government officials. Further investigation reveals a positive association between political visits and operating performance, which is contingent on different firm and institutional characteristics and is robust after applying propensity score matching and institutional variable techniques. Moreover, the results show that political visits can be substituted as a source of legitimacy for CSR activities and increase the social attention and expectation on the firms, which reduces firms’ incentive to donate while motivating their unethical behaviour in order to meet social expectations. Chapter 5 introduces the concept of passive signalling to extend existing signalling theory. Political endorsements and visits are discussed as two examples of passive signals, and the effects of passive signals are examined in an IPO setting wherein information asymmetry is a serious problem. The results show that passive signals can efficaciously influence the views of shareholders, potential institutional and private investors, regulators and partners, thus affecting every part of the IPO process, including IPO application, valuation during issuing and post-IPO performance. Specifically, the results demonstrate that firms with passive signals are associated with higher likelihood of IPO success, narrower offer price spread, lower underpricing and better long-run performance. This chapter also provides a theoretical background for the previous two chapters about the mechanisms of endorsements and visits to influence investors’ evaluation. Overall, this thesis provides evidence supporting the effectiveness of the two under-researched ways in which the government influences the market and contributes to the literature on the role of government, political economy, political connection, signalling theory, entrepreneurship and CSR.