Abstract
In this paper, we examine government influence on the acquisition behavior of Chinese firms. Drawing from the state capitalism literature, we test hypotheses regarding the effect of provincial government ownership and managerial ties respectively on industry relatedness of firm acquisitions. We furthermore test hypotheses concerning the moderating effect of institutional development and governor age and tenure. We test our hypotheses based on analysis of 346 majority acquisition deals completed by first-time acquirers in China between 2002 and 2014. Our results show that provincial government-owned firms and firms with ties to the same are more likely to conduct unrelated acquisitions within their home province compared to acquisitions across provincial boundaries. Similar patterns do not exist for privately owned firms or for firms with no managerial ties to provincial governments. Institutional development and governor age and tenure are found to have no moderating effects. We relate our findings to the main theoretical views of state capitalism and suggest that our results reflect government attempts to promote economic growth and social development. Our study contributes to the understanding of Chinese state capitalism and the cross-province barriers for business in China.
Similar content being viewed by others
References
Amihud, Y., & Lev, B. (1999). Does corporate ownership structure affect its strategy towards diversification? Strategic Management Journal, 20(11), 1063–1069.
Arnoldi, J., & Villadsen, A. (2015). Political ties of listed Chinese companies, performance effects, and moderating institutional factors. Management and Organization Review, 11(2), 217–236.
Bai, C.-E., Lu, J., & Tao, Z. (2006). The multitask theory of state enterprise reform: Empirical evidence from China. American Economic Review, 96(2), 353–357.
Bernardo, A. E., & Chowdhry, B. (2002). Resources, real options, and corporate strategy. Journal of Financial Economics, 63(2), 211–234.
Cai, W., Xu, F., & Zeng, C. (2017). Does political pressure matter in bank lending? Evidence from China. Financial Markets. Institutions & Instruments, 26(5), 249–277.
Chakrabarti, A., & Mitchell, W. (2013). The persistent effect of geographic distance in acquisition target selection. Organization Science, 24(6), 1805–1826.
Chatterjee, S., & Wernerfelt, B. (1991). The link between resources and type of diversification: Theory and evidence. Strategic Management Journal, 12(1), 33–48.
Chen, C. J., & Yu, C. M. J. (2012). Managerial ownership, diversification, and firm performance: Evidence from an emerging market. International Business Review, 21(3), 518–534.
Chen, V. Z., Li, J., & Shapiro, D. M. (2011a). Are OECD-prescribed “good corporate governance practices” really good in an emerging economy? Asia Pacific Journal of Management, 28(1), 115–138.
Chen, S., Sun, Z., Tang, S., & Wu, D. (2011b). Government intervention and investment efficiency: Evidence from China. Journal of Corporate Finance, 17(2), 259–271.
Cheng, X., & Degryse, H. (2010). The impact of bank and non-bank financial institutions on local economic growth in China. Journal of Financial Services Research, 37(2), 179–199.
Chi, J., Sun, Q., & Young, M. (2011). Performance and characteristics of acquiring firms in the Chinese stock markets. Emerging Markets Review, 12(2), 152–170.
Collins, J. D., Holcomb, T. R., Certo, S. T., & Hitt, M. A. (2009). Learning by doing: Cross-border mergers and acquisitions. Journal of Business Research, 62(12), 1329–1344.
Cui, L., & Jiang, F. (2012). State ownership effect on firms’ FDI ownership decisions under institutional pressure: A study of Chinese outward-investing firms. Journal of International Business Studies, 43(3), 264–284.
Daniel, F., Lohrke, F. T., & Fornaciari, C. J. (2004). Slack resources and firm performance: A meta-analysis. Journal of Business Studies, 57(6), 565–574.
Delios, A., & Wu, Z. J. (2005). Legal person ownership, diversification strategy and firm profitability in China. Journal of Management and Governance, 9(2), 151–169.
Delios, A., Zhou, N., & Xu, W. W. (2008). Ownership structure and the diversification and performance of publicly listed companies in China. Business Horizons, 51(6), 473–483.
Deng, X., Tian, Z., Li, J., & Abrar, M. (2012). The diversification effects of a firm’s political connection and its performance implications: Evidence from China. Chinese Management Studies, 6(3), 462–487.
Dillard, J. F., Rigsby, J. T., & Goodman, C. (2004). The making and remaking of organization context: Duality and the institutionalization process. Accounting. Auditing & Accountability Journal, 17(4), 506–542.
Du, J., Lu, Y., & Tao, Z. (2015). Government expropriation and Chinese-style firm diversification. Journal of Comparative Economics, 43(1), 155–169.
Eberhardt, M., Zheng, W., & Yu, Z. (2013). Intra-national protectionism in China: Evidence from the public disclosure of ‘illegal’ drug advertising. CSAE working paper series no. 2013-07, Centre for the Study of African Economies, University of Oxford.
Fan, G., Wang, X., & Zhu, H. (2011). NERI index of marketization of China’s provinces: 2011 report. Beijing: National Economic Research Institute (in Chinese).
Fan, J. P., Huang, J., Oberholzer-Gee, F., Smith, T. D., & Zhao, M. (2008). Diversification of Chinese companies: An international comparison. Chinese Management Studies, 2(1), 6–13.
Gardner, Jr., E. S. (2006). Exponential smoothing: The state of the art—Part II. International Journal of Forecasting, 22: 637–666.
Goranova, M., Alessandri, T. M., Brandes, P., & Dharwadkar, R. (2007). Managerial ownership and corporate diversification: A longitudinal view. Strategic Management Journal, 28(3), 211–225.
He, J., Mao, X., Riu, O. R., & Zha, X. (2013). Business groups in China. Journal of Corporate Finance, 22, 166–192.
Heckman, J. J. (1979). Sample selection bias as a specification error. Econometrica, 47(1), 153–161.
Hoskisson, R. E., Johnson, R. A., Tihanyi, L., & White, R. E. (2005). Diversified business groups and corporate refocusing in emerging economies. Journal of Management, 31(6), 941–965.
Hu, X., & Shi, J. (2009). The relationship between political resources and diversification of private enterprises: An empirical study of the top 500 private enterprises in China. Frontiers of Business Research in China, 3(2), 207–223.
Jiang, F. (2008). Determinants of diversification by listed firms in China. Frontiers of Business Research in China, 2(2), 170–186.
Jing, R., & McDermott, P. (2013). Transformation of state-owned enterprises in China: A strategic action model. Management and Organization Review, 9(1), 53–86.
Jing, S. (2011). Managers’ political connection, corporate diversification strategy and enterprise growth: Evidence from China’s listed company of manufacturing industry. 2011 International Conference on Management Science & Engineering 18th Annual Conference Proceedings (pp. 432–437). Rome. doi: https://doi.org/10.1109/ICMSE.2011.6069998.
Johnson, S., Boone, P., Breach, A., & Friedman, E. (2000a). Corporate governance in the Asian financial crisis. Journal of Financial Economics, 58(1), 141–186.
Johnson, S., Porta, R. L., Lopez-de-Silanes, F., & Shleifer, A. (2000b). Tunneling. American Economic Review, 90(2), 22–27.
Keister, L. A. (1998). Engineering growth: Business group structure and firm performance in China’s transition economy. American Journal of Sociology, 104(2), 404–440.
Khanna, T., & Palepu, K. (2000). Is group affiliation profitable in emerging markets? An analysis of diversified Indian business groups. Journal of Finance, 55(2), 867–891.
Lee, K., & Jin, X. (2009). The origins of business groups in China: An empirical testing of the three paths and the three theories. Business History, 51(1), 77–99.
Li, H., & Zhou, L.-A. (2005). Political turnover and econominc performance: The incentive role of personnel control in China. Journal of Public Economics, 89(2005), 1743–1762.
Li, J., & Qian, C. (2013). Principal-principal conflicts under weak institutions: A study of corporate takeovers in China. Strategic Management Journal, 34(4), 498–508.
Li, M. H., Cui, L., & Lu, J. (2014). Varieties in state capitalism: Outward FDI strategies of central and local state-owned enterprises from emerging economy countries. Journal of International Business Studies, 45(8), 980–1004.
Li, M., & Wong, Y. Y. (2003). Diversification and economic performance: An empirical assessment of Chinese firms. Asia Pacific Journal of Management, 20(2), 243–265.
Li, W., He, A., Lan, H., & Yiu, D. (2012). Political connections and corporate diversification in emerging economies: Evidence from China. Asia Pacific Journal of Management, 29(3), 799–818.
Li, X., & Rwegasira, K. (2008). Diversification and corporate performance in China: An agency theory perspective. Journal of Transnational Management, 13(2), 132–147.
Lin, C., & Su, D. (2008). Industrial diversification, partial privatization and firm valuation: Evidence from publicly listed firms in China. Journal of Corporate Finance, 14(4), 405–417.
Lin, L. W., & Milhaupt, C. J. (2013). We are the (national) champions: Understanding the mechanisms of state capitalism in China. Stanford Law Review, 65(4), 697–759.
Lin, N. (2011). Capitalism in China: A centrally managed capitalism (CMC) and its future. Management and Organization Review, 7(1), 63–96.
Lin, Z. J., Peng, M. W., Yang, H., & Sun, S. L. (2009). How do networks and learning drive M&As? An institutional comparison between China and the United States. Strategic Management Journal, 30(10), 1113–1132.
Liu, M., Song, B., & Tao, R. (2006). Perspective on local governance reform in China. China & World Economy, 14(2), 16–31.
Lu, Y., & Yao, J. (2006). Impact of state ownership and control mechanisms on the performance of group affiliated companies in China. Asia Pacific Journal of Management, 23(4), 485–503.
Luo, Y., Huang, Y., & Wang, S. L. (2012). Guanxi and organizational performance: A meta-analysis. Management and Organization Review, 8(1), 139–172.
Ma, X., & Lu, J. (2005). The critical role of business groups in China. Ivey Business Journal, 69(5), 1–12.
Muratova, Y. (2015). The drivers of domestic acquisitions in People’s republic of China: A resource-based analysis. Asia Pacific Business Review, 21(4), 500–516.
Musacchio, A., Lazzarini, S. G., & Aguilera, R. V. (2015). New varieties of state capitalism: Strategic and governance implications. Academy of Management Perspectives, 29(1), 115–131.
Naughton, B. (2011). China’s economic policy today: The new state activism. Eurasian Geography and Economics, 52(3), 313–329.
Park, C. (2002). The effects of prior performance on the choice between related and unrelated acquisitions: Implications for the performance consequences of diversification strategy. Journal of Management Studies, 39(7), 1003–1081.
Peng, M. W. (2002). Towards an institution-based view of business strategy. Asia Pacific Journal of Management, 19(2), 251–267.
Peng, M. W., Luo, Y., & Sun, L. (1999). Firm growth via mergers and acquisitions in China. In L. Kelley & Y. Luo (Eds.), China 2000 (pp. 73–100). Thousand Oaks: Sage.
Peng, M. W., Tan, J., & Tong, T. W. (2004). Ownership types and strategic groups in an emerging economy. Journal of Management Studies, 41(7), 1105–1129.
Seo, B. K., Lee, K., & Wang, X. (2010). Causes for changing performance of the business groups in a transition economy: Market-level versus firm-level factors in China. Industrial and Corporate Change, 19(6), 2041–2072.
Silver, M. (1997). Business statistics (2nd ed.). New York: McGraw-Hill.
Tan, J. (2002). Impact of ownership type on environment-strategy linkage and performance: Evidence from a transitional economy. Journal of Management Studies, 39(3), 333–354.
Wang, C., Yi, J., Kafouros, M., & Yan, Y. (2015). Under what institutional conditions do business groups enhance innovation performance? Journal of Business Research, 68(3), 694–702.
Wang, J., & Ye, K. (2014). Managerial agency costs of socialistic internal capital markets: Empirical evidence from China. Journal of International Financial Management and Accounting, 25(1), 1–37.
Wang, L., & Zajac, E. J. (2007). Alliance or acquisition? A dyadic perspective on interfirm resource combinations. Strategic Management Journal, 28(13), 1291–1317.
Yi, Z., & Xi, L. (2006). Ownership structure and corporate diversification. Business & Politics, 8(1), 1–19.
Young, M. N., Peng, M. W., Ahlstrom, D., Bruton, G. D., & Jiang, Y. (2008). Corporate governance in emerging economies: A review of the principal-principal perspective. Journal of Management Studies, 45(1), 196–220.
Yu, J., Zhou, L. A., & Zhu, G. (2013). Strategic interaction in political competition: Evidence from spatial effects across Chinese cities. Working paper, Ganghua School of Management, Peking University.
Zhang, M., Su, J., Sun, Y., Zhang, W., & Shen, N. (2015). Political connections and corporate diversification: An exploration of Chinese firms. Emerging Markets Finance & Trade, 51(1), 234–246.
Zhao, J. (2010). Ownership structure and corporate diversification strategies of Chinese business groups. Management Research Review, 33(12), 1101–1112.
Zhou, B., Doukas, A. J., Hua, J., & Guo, J. (2015). Does state ownership drive M&A performance? Evidence from China. European Financial Management, 21(1), 79–105.
Zhou, N., & Delios, A. (2012). Diversification and diffusion: A social networks and institutional perspective. Asia Pacific Journal of Management, 29(3), 773–798.
Zhu, H., & Zhu, Q. (2016). Mergers and acquisitions by Chinese firms: A review and comparison with other mergers and acquisitions research in the leading journals. Asia Pacific Journal of Management, 33(4), 1107–1149.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Arnoldi, J., Muratova, Y. Unrelated acquisitions in China: The role of political ownership and political connections. Asia Pac J Manag 36, 113–134 (2019). https://doi.org/10.1007/s10490-018-9571-2
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10490-018-9571-2