Political connections and privatization: Evidence from China

We examine how the political connections of acquirers influence the process and outcomes of privatization in China. We find that politically connected acquirers receive preferential treatment and acquire higher quality firms during full privatization, and document evidence of post-privatization tunneling from target firms to acquirers. We show that the excessive tunneling by politically connected acquirers is associated with lower performance after privatization. Overall, our results suggest that individuals are likely to abuse their political connections to exploit the opportunities arising from privatization. We recommend that policymakers constrain the influence of political connections in the privatization process.