A new research study co-authored by CEIBS Cathay Capital Chair in Accounting Professor of Accounting Ding Yuan and Assistant Professor of Finance Zhang Hua looks at how different types of social ties or social capital affect the post-IPO performance of Chinese entrepreneurial firms. Their findings show that having political connections or a high percentage of external investors tended to enhance the post-IPO performance of the non-SOE entrepreneurial Chinese firms that listed on the Chinese stock market between 1996 and 2007. The results show that in China social capital has had a much greater effect than formal governance mechanisms on post-IPO accounting performance.

The study has practical implications for firms, investors and regulators in emerging and transitional economies which tend to have weak formal institutions. For entrepreneurs, acquiring political “bridging” social capital should be considered as part of the business strategy as results show it has a strong bearing on accounting and market performance after an IPO. In addition, it is important to keep in mind the needs of external shareholders. Furthermore, the benefits and costs of intra-group bonding capital should be carefully balanced. For investors, the findings can serve as a roadmap for those who want to scrutinize a firm’s management more closely. Finally, for regulators and policymakers, the results show developing a market economy with strong formal institutions is the precondition in order to reduce the effects of political connections.

Although a more market-driven regulation reform governing IPOs in China was announced in late 2013, Prof. Ding Yuan says the Chinese regulator (CSRC)’s behaviours during the wave of IPOs that debuted in January 2014 have shown all but the contrary: fixed floating share offering, more interventions in IPO fixation, limits of first-day stock price and suspension of trades, and even arbitrary suspension of IPO if the regulator thinks the price is not correct.

The results of the study by Prof. Ding, Assistant Prof. Zhang and co-author Jerry X. Cao of Singapore Management University will be published in the Journal of Business Ethics in a paper entitled, “Social Capital, Informal Governance and Post-IPO Firm Performance: A study of Chinese entrepreneurial firms”.