ARTICLE IN PRESS

Journal of Financial Economics 84 (2007) 330–357 www.elsevier.com/locate/jfec

Politically connected CEOs, corporate governance, and Post-IPO performance of China’s newly partially privatized firms$
Joseph P.H. Fana,Ã, T.J. Wonga, Tianyu Zhangb a The Chinese University of Hong Kong, Shatin, N.T., Hong Kong b City University of Hong Kong, Kowloon, Hong Kong

Received 19 August 2005; received in revised form 31 January 2006; accepted 6 March 2006 Available online 24 January 2007

Abstract Almost 27% of the CEOs in a sample of 790 newly partially privatized firms in China are former or current government bureaucrats. Firms with politically connected CEOs underperform those without politically connected CEOs by almost 18% based on three-year post-IPO stock returns and have poorer three-year post-IPO earnings growth, sales growth, and change in returns on sales. The negative effect of the CEO’s political ties also show up in the first-day stock return. Finally, firms led by politically connected CEOs are more likely to appoint other bureaucrats to the board of directors rather than directors with relevant professional backgrounds. r 2007 Elsevier B.V. All rights reserved.
JEL classification: G34; L33; P31 Keywords: Political connections; Corporate governance; IPO performance; Partial privatization; China

We appreciate helpful comments from Stijn Claessens, Mara Faccio, Simon Johnson, Florencio Lopez-deSilanes, John McConnell, Randall Morck, Harold Mulherin, Sheridan Titman, Yijiang Wang, Mengxin Zhao, an anonymous referee, and participants in the 2003 ‘‘The Management and Performance of China’s Domestic Private Firms: Multi-Disciplinary Perspectives’’ Research Progress Workshop at the Hong Kong University of Science and Technology, the 2004 Hitotsubashi University Corporate Governance Conference, the 2004 Asian Finance Association Conference