Political connections and access to IPO markets in China

•Political connections bring firms regulatory benefits in China’s IPO markets.•Politically-connected firms are more likely to be approved for IPOs.•Politically-connected firms are more likely to receive preferential treatments.•Politically-connected firms are less likely to be selected for pre-IPO auditing.•The findings may help explain the operation of China’s IPO markets.

Using hand-collected data on IPOs by private-owned enterprises, this article examines the regulatory benefits of political connections in China's state-controlled going public process, a subject that has rarely been investigated in existing literature. This article makes the following findings: first, political connections have significant positive impact on enterprises' chances of being approved for IPOs; second, enterprises with political connections are significantly more likely to receive preferential treatments (e.g., higher offering price-to-earning ratio) from regulatory authorities; third, enterprises with political connections are significantly less likely to be selected for pre-IPO on-site auditing by regulatory authorities. The findings of this article may provide answer to the question why China has been so reluctant to adopt disclosure-based regulatory regime as well as insights into the puzzle of the consistent poor performance of China's stock markets.