Government intervention in the capital allocation process: Excess employment as an IPO selection rule in China |
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| Institution: | 1. Stockholm School of Economics, Sweden;2. Lingnan College, Sun Yat-sen University, China;3. SOFI, Stockholm University, Sweden;4. Research Institute for Industrial Economics, Stockholm, Sweden;5. Shenzhen Graduate School of Harbin Institute of Technology, Shenzhen, China;1. School of Public Economics & Administration, Shanghai University of Finance & Economics, China;2. School of Finance, China Financial Policy Research Center, Renmin University of China, Beijing, China;1. Nanjing University, School of Business, Nanjing, China;2. City University of Hong Kong, Accounting Department, Hong Kong, China;3. Chinese University of Hong Kong, School of Accountancy, Hong Kong, China;4. Zhejiang University of Finance & Economics, School of Accountancy, Hangzhou, Shanghai University of Finance & Economics, School of Accountancy, Xueyuan Street No.18, Xiasha Higher Education Park, Hangzhou 310018, Shanghai, China |
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| 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. |
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