Advertisement

Journal of Business Ethics

, Volume 134, Issue 4, pp 529–551 | Cite as

Social Capital, Informal Governance, and Post-IPO Firm Performance: A Study of Chinese Entrepreneurial Firms

  • Jerry X. Cao
  • Yuan Ding
  • Hua Zhang
Article

Abstract

Social capital can serve as informal governance in weak investor-protection regimes. Using hand-collected data on entrepreneurs’ political connections and firm ownership, we construct several original measures of social capital and examine their effect on the performance of entrepreneurial firms in China after their initial public offerings. Political connections or a high percentage of external investors tend to enhance firm performance, but intragroup related-party transactions commonly lead to performance decline. These forms of social capital have a strong influence on the performance of Chinese firms, whereas formal governance variables such as board size or board independence have little effect. Although social capital may serve as an informal governance mechanism and effectively substitute for formal governance mechanisms in an emerging market, this role of social capital raises several ethical concerns, notably the development of rent-seeking and crony capitalism.

Keywords

Post-IPO performance Social capital Agency theory Entrepreneur Political connection China 

Notes

Acknowledgments

The authors would like to thank Douglas Cumming, Wenxuan Hou, Edward Lee (editors) and one anonymous reviewer, the participants at the European Accounting Association Annual Meeting (Ljubljana, Slovenia, May 2012), the 2012 Asian Finance Association (AsianFA) Annual Meeting (Taipei, July 2012), and the Conference on Sustainable and Ethical Entrepreneurship, Corporate Finance and Governance, and Institutional Reform in China (Beijing, April 2013) for their helpful comments and advice. The authors acknowledge financial support from the CEIBS Research Fund. The research assistance to Yvonne Yuan, Sophie Xiao, and Yuanyang Song is greatly appreciated. The authors also thank Ann Gallon for her much appreciated editorial help.

References

  1. Aarstad, J., Haugland, S. A., & Greve, A. (2010). Performance spillover effects in entrepreneurial networks: Assessing a dyadic theory of social capital. Entrepreneurship Theory and Practice, 34(5), 1003–1020.CrossRefGoogle Scholar
  2. Acemoglu, D. (2003). Why not a political coase theorem? Social conflict, commitment and politics. Journal of Comparative Economics, 31(4), 620–652.CrossRefGoogle Scholar
  3. Acemoglu, D., Johnson, S., & Robinson, J. (2001). The colonial origins of comparative development: An empirical investigation. American Economic Review, 91(5), 1369–1401.CrossRefGoogle Scholar
  4. Acemoglu, D., Johnson, S., & Robinson, J. (2002). Reversal of fortune: Geography and institutions in the making of the modern world income distribution. Quarterly Journal of Economics, 117(4), 1231–1294.CrossRefGoogle Scholar
  5. Acemoglu, D., & Robinson, J. (2000). Why did the west extend the franchise? Democracy, inequality and growth in historical perspective. Quarterly Journal of Economics, 115(4), 1167–1199.CrossRefGoogle Scholar
  6. Adler, P. S., & Kwon, S.-W. (2002). Social capital: Prospects for a new concept. Academy of Management Review, 27(1), 17–40.Google Scholar
  7. Aguilera, R., Filatotchev, I., Gospel, H., & Jackson, G. (2008). Contingencies, complementarities, and costs in corporate governance models. Organization Science, 19(3), 475–492.CrossRefGoogle Scholar
  8. Ahlstrom, D., & Bruton, G. D. (2006). Venture capital in emerging economies: Networks and institutional change. Entrepreneurship Theory and Practice, 30(2), 299–320.CrossRefGoogle Scholar
  9. Aldrich, H. E., & Fiol, C. M. (1994). Fools rush in? The institutional context of industry creation. Academy of Management Review, 19, 645–670.Google Scholar
  10. Aldrich, H., & Zimmer, C. (1986). Entrepreneurship through social networks. In D. Sexton & R. Smilor (Eds.), The art and science of entrepreneurship (pp. 3–23). Cambridge, MA: Ballinger.Google Scholar
  11. Bae, K. H., Baek, J. S., Kang, J. K., & Liu, W. L. (2012). Do controlling shareholders’ expropriation incentives imply a link between corporate governance and firm value? Theory and evidence. Journal of Finance Economics, 105(2), 412–435.CrossRefGoogle Scholar
  12. Becker, C. L., Defond, M. L., Jiambalvo, J., & Subramanyam, K. R. (1998). The effect of audit quality on earnings management. Contemporary Accounting Research, 15(1), 1–24.CrossRefGoogle Scholar
  13. Berle, A. A., & Means, G. C. (1932). The Modern corporation and private property. New York: Harcourt, Brace & World Inc.Google Scholar
  14. Birley, S. (1985). The role of networks in the entrepreneurial process. Journal of Business Venturing, 1(1), 107–118.CrossRefGoogle Scholar
  15. Boisot, M., & Child, J. (1996). From fiefs to clans and network capitalism: Explaining China’s emerging economic order. Administrative Science Quarterly, 41(4), 600–628.CrossRefGoogle Scholar
  16. Bourdieu, P. (1985). The forms of capital. In J. G. Richardson (Ed.), Handbook of theory and research for the sociology of education. New York: Greenwood.Google Scholar
  17. Brau, J. C., & Fawcett, S. E. (2006). Initial public offerings: An analysis of theory and practice. Journal of Finance, 61(1), 399–436.CrossRefGoogle Scholar
  18. Bull, I., & Willard, G. (1993). Towards a theory of entrepreneurship. Journal of Business Venturing, 8(3), 183–195.CrossRefGoogle Scholar
  19. Burt, R. S. (1992). Structural holes: The social structure of competition. Cambridge, MA: Harvard University Press.Google Scholar
  20. Burt, R. S. (2004). Structural holes and good ideas. American Journal of Sociology, 110(2), 349–399.CrossRefGoogle Scholar
  21. Carolis, D. M. D., Litzky, B. E., & Eddleston, K. A. (2009). Why networks enhance the progress of new venture creation: The influence of social capital and cognition. Entrepreneurship Theory and Practice, 33, 527–545.CrossRefGoogle Scholar
  22. Chang, S. J. (2003). Ownership structure, expropriation, and performance of group-affiliated companies in Korea. Academy of Management Journal, 46(2), 238–253.CrossRefGoogle Scholar
  23. Chen, Z., Cheung, Y.-L., Stouraitis, A., & Wong, A. W. S. (2005). Ownership concentration, firm performance, and dividend policy in Hong Kong. Pacific-Basin Finance Journal, 13(4), 431–449.CrossRefGoogle Scholar
  24. Chung, H. (2006). Managerial ties, control and deregulation: An investigation of business groups entering the deregulated banking industry in Taiwan. Asia Pacific Journal of Management, 23(4), 505–520.CrossRefGoogle Scholar
  25. Claessens, S., Djankov, S., Fan, J., & Lang, L. (2002). Disentangling the incentive and entrenchment effects of large shareholdings. Journal of Finance, 57, 2741–2772.CrossRefGoogle Scholar
  26. Clemens, E. S., & Cook, J. M. (1999). Politics and institutionalism: Explaining durability and change. Annual Review of Sociology, 25, 441–466.CrossRefGoogle Scholar
  27. Cumming, D., & Hou, W. (2014). Valuation of restricted shares by conflicting shareholders in the Split Share Structure Reform. European Journal of Finance, 20(7–9), 778–802.Google Scholar
  28. dela Rama, M. (2012). Corporate governance and corruption: Ethical dilemmas of Asian business groups. Journal of Business Ethics, 109, 501–519.CrossRefGoogle Scholar
  29. Dess, G. G., & Shaw, J. D. (2001). Voluntary turnover, social capital, and organizational performance. Academy of Management Review, 26(3), 446–456.Google Scholar
  30. Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2002). The regulation of entry. Quarterly Journal of Economics, 117(1), 1–37.CrossRefGoogle Scholar
  31. Dyer, W. G., Jr, & Mortensen, S. P. (2005). Entrepreneurship and family business in a hostile environment: The case of Lithuania. Family Business Review, 18(3), 247–258.CrossRefGoogle Scholar
  32. Ellis, P. (2000). Social ties and foreign market entry. Journal of International Business Studies, 31(3), 443–469.CrossRefGoogle Scholar
  33. Eng, L. L., & Mak, Y. T. (2003). Corporate governance and voluntary disclosure. Journal of Accounting and Public Policy, 22(4), 325–345.CrossRefGoogle Scholar
  34. Faccio, M., & Lang, L. (2002). The ultimate ownership of Western European corporations. Journal of Financial Economics, 65, 365–395.CrossRefGoogle Scholar
  35. Faccio, M., Lang, L. H. P., & Young, L. (2001). Dividends and expropriation. American Economic Review, 91, 54–78.CrossRefGoogle Scholar
  36. Fan, J. P. H., Wong, T. J., & Zhang, T. Y. (2007). Politically connected CEOs, corporate governance, and post-IPO performance of China’s newly partially privatized firms. Journal of Financial Economics, 84, 330–357.CrossRefGoogle Scholar
  37. Fischer, E., & Reuber, R. (2007). The good, the bad, and the unfamiliar: The challenges of reputation formation facing new firms. Entrepreneurship Theory and Practice, 31(1), 53–75.CrossRefGoogle Scholar
  38. Friedman, E., Johnson, S., & Mitton, T. (2003). Propping and tunnelling. Journal of Comparative Economics, 31, 732–750.CrossRefGoogle Scholar
  39. Helmke, G., & Levitsky, S. (2003). Informal institutions and comparative politics: A research agenda. Perspective on Politics, 2(4), 725–740.CrossRefGoogle Scholar
  40. Hoang, H., & Antoncic, B. (2003). Network-based research in entrepreneurship: A critical review. Journal of Business Venturing, 18, 165–187.CrossRefGoogle Scholar
  41. Hou, W., & Lee, E. (2013). Split Share Structure Reform, corporate governance, and the foreign share discount puzzle in China. European Journal of Finance (forthcoming). Google Scholar
  42. Hung, M., Wong, T. J., & Zhang, T. (2012). Political considerations in the decision of Chinese SOEs to list in Hong Kong. Journal of Accounting and Economics, 53(1–2), 435–449.CrossRefGoogle Scholar
  43. Ireland, R. D., Tihanyi, L., & Webb, J. W. (2008). A tale of two politico-economic systems: Implications for entrepreneurship in Central and Eastern Europe. Entrepreneurship Theory and Practice, 32, 107–130.CrossRefGoogle Scholar
  44. Jain, B. A., & Kini, O. (1994). The post-issue accounting performance of IPO firms. Journal of Finance, 49, 1699–1726.CrossRefGoogle Scholar
  45. Johnson, S., Porta, R. L., Lopez-de-Silanes, F., & Shleifer, A. (2000). Tunneling. American Economic Review, 90, 22–27.CrossRefGoogle Scholar
  46. Jonsson, S., & Lindbergh, J. (2011). The development of social capital and financing of entrepreneurial firms: From financial bootstrapping to bank funding. Entrepreneurship Theory and Practice, 37(4), 661–686.CrossRefGoogle Scholar
  47. Khanna, T., & Palepu, K. (2000). Is group affiliation profitable in emerging markets? An analysis of diversified Indian business groups. Journal of Finance, 55, 867–891.CrossRefGoogle Scholar
  48. Kornai, J. (1979). Resource-constrained versus demand-constrained systems. Econometrica, 47(4), 801–819.CrossRefGoogle Scholar
  49. Krishnan, C. N. V., Ivanov, V. I., Masulis, R. W., & Singh, A. K. (2011). Venture capital reputation, post-IPO performance, and corporate governance. Journal of Financial and Quantitative Analysis, 46, 1295–1333.CrossRefGoogle Scholar
  50. Kroll, M., Walters, B. A., & Le, S. A. (2007). The impact of board composition and top management team ownership structure on post-IPO performance in young entrepreneurial firms. Academy of Management Journal, 50, 1198–1216.CrossRefGoogle Scholar
  51. Krueger, Anne. O. (1974). The political economy of the rent-seeking society. American Economic Review, 64, 291–303.Google Scholar
  52. La Porta, R., Lopez-de-Silances, F., & Shleifer, A. (1999). Corporate ownership around the world. Journal of Finance, 54(2), 471–517.CrossRefGoogle Scholar
  53. Le, N. T. B., & Nguyen, T. V. (2009). The impact of networking on bank financing: The case of small and medium-sized enterprises in Vietnam. Entrepreneurship Theory and Practice, 33, 867–887.CrossRefGoogle Scholar
  54. Le, T. B. N., Venkatesh, S., & Nguyen, V. T. (2006). Getting bank financing: Study of Vietnamese private firms. Asia Pacific Journal of Management, 23(2), 209–227.CrossRefGoogle Scholar
  55. Li, H., & Zhang, Y. (2007). The role of managers’ political networking and functional experience in new venture performance: Evidence from China’s transition economy. Strategic Management Journal, 28, 791–804.CrossRefGoogle Scholar
  56. Lipparini, A., & Sobrero, M. (1994). The glue and the pieces: Entrepreneurship and innovation in small-firm networks. Journal of Business Venturing, 9(2), 125–140.CrossRefGoogle Scholar
  57. Maurer, I., & Ebers, M. (2006). Dynamics of social capital and their performance implications: Lessons from biotechnology start-ups. Administrative Science Quarterly, 51(2), 262–292.CrossRefGoogle Scholar
  58. Mikkelson, W. H., Partch, M. M., & Shah, K. (1997). Ownership and accounting performance of companies that go public. Journal of Financial Economics, 44, 281–307.CrossRefGoogle Scholar
  59. Miner, A. S., Amburgey, T. L., & Stearns, T. M. (1990). Interorganizational linkages and population dynamics: Buffering and transformational shields. Administrative Science Quarterly, 35(4), 689–713.CrossRefGoogle Scholar
  60. Morck, R., & Yeung, B. (2004). Family control and the rent-seeking society. Entrepreneurship Theory and Practice, 28(4), 391–409.CrossRefGoogle Scholar
  61. Nahapiet, J., & Ghoshal, S. (1998). Social capital, intellectual capital, and the organizational advantage. Academy of Management Review, 23(2), 242–266.Google Scholar
  62. Nguyen, V. T., Le, T. B. N., & Freeman, N. J. (2006). Trust and uncertainty: A study of bank lending to private SMEs in Vietnam. Asia Pacific Business Review, 12(4), 547–567.CrossRefGoogle Scholar
  63. Nielsen, R. P. (2003). Corruption networks and implications for ethical corruption reform. Journal of Business Ethics, 42, 125–149.CrossRefGoogle Scholar
  64. North, D. C. (1990). Institutions, institutional change and economic performance. New York: Cambridge University Press.CrossRefGoogle Scholar
  65. Ostgaard, T. A., & Birley, S. (1996). New venture growth and personal networks. Journal of Business Research, 36, 37–50.CrossRefGoogle Scholar
  66. Peng, M. W. (2001). How entrepreneurs create wealth in transition economies. Academy of Management Executive, 15(1), 95–110.CrossRefGoogle Scholar
  67. Peng, M. W. (2002). Towards an institution-based view of business strategy. Asia Pacific Journal of Management, 19(2/3), 251–267.CrossRefGoogle Scholar
  68. Peng, M. W. (2003). Institutional transitions and strategic choices. Academy of Management Review, 28, 275–296.Google Scholar
  69. Peng, M. W., & Heath, P. S. (1996). The growth of the firm in planed economies in transition: Institutions, organizations, and strategic choice. Academy of Management Review, 21(2), 492–528.Google Scholar
  70. Peng, M. W., & Luo, Y. (2000). Managerial ties and firm performance in a transition economy: The nature of a micro-macro link. Academy of Management Journal, 43(3), 486–501.CrossRefGoogle Scholar
  71. Piotroski, J. D., & Zhang, T. (2014). Politicians and the IPO decision: The impact of impending political promotions on IPO activity in China. Journal of Financial Economics, 111(1), 111–136.CrossRefGoogle Scholar
  72. Ritter, J. R., & Welch, I. (2002). A review of IPO activity, pricing, and allocations. Journal of Finance, 57, 1795–1828.CrossRefGoogle Scholar
  73. Rosenstein, S., & Wyatt, J. G. (1990). Outside directors, board independence, and shareholder wealth. Journal of Financial Economics, 26(2), 175–191.CrossRefGoogle Scholar
  74. Russo, A., & Perrini, F. (2010). Investigating stakeholder theory and social capital: CSR in large firms and SMEs. Journal of Business Ethics, 91, 207–221.CrossRefGoogle Scholar
  75. Sanders, P. (2010). Managing under duress: Ethical leadership, social capital and the civilian administration of the British Channel Islands during the Nazi occupation, 1940–1945. Journal of Business Ethics, 93, 113–129.CrossRefGoogle Scholar
  76. Shane, S., & Venkataraman, S. (2000). The promise of entrepreneurship as a field of research. Academy of Management Review, 25, 217–226.Google Scholar
  77. Shaw, J. D., Duffy, M. K., Johnson, J. L., & Lockhart, D. E. (2005). Turnover, social capital losses, and performance. Academy of Management Journal, 48(4), 594–606.CrossRefGoogle Scholar
  78. Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. The Journal of Finance, 52(2), 737–783.CrossRefGoogle Scholar
  79. Smallbone, D., & Welter, F. (2001). The distinctiveness of entrepreneurship in transition economies. Small Business Economics, 16(4), 249–262.CrossRefGoogle Scholar
  80. Spence, L. J., Schmidpeter, R., & Habisch, A. (2003). Assessing social capital: Small and medium sized enterprises in Germany and the U.K. Journal of Business Ethics, 42, 17–29.CrossRefGoogle Scholar
  81. Stiglitz, J. (1994). Whither socialism? Wicksell lectures. Cambridge: MIT Press.Google Scholar
  82. Stinchcombe, A. (1965). Social structure and organizations. In J. G. March (Ed.), Handbook of organizations (pp. 142–193). Chicago: Rand-McNally.Google Scholar
  83. Story, J. (2012, March 3). Survival rules in the party state. South China Morning Post.Google Scholar
  84. Tian, Z., Gao, H., & Cone, M. (2008). A study of the ethical issues of private entrepreneurs participating in politics in China. Journal of Business Ethics, 80, 627–642.CrossRefGoogle Scholar
  85. Tonoyan, V., Strohmeyer, R., Habib, M., & Perlitz, M. (2010). Corruption and entrepreneurship: How formal and informal institutions shape small firm behavior in transition and mature market economies. Entrepreneurship Theory and Practice, 34(5), 803–831.CrossRefGoogle Scholar
  86. Tsai, W., & Ghoshal, S. (1998). Social capital and value creation: The role of intrafirm networks. Academy of Management Journal, 41(4), 464–478.CrossRefGoogle Scholar
  87. Tu, G., Lin, B., & Liu, F. (2013). Political connections and privatization: Evidence from China. Journal of Accounting and Public Policy, 32(2), 114–135.CrossRefGoogle Scholar
  88. Uzzi, B. D. (1996). The sources and consequences of embeddedness for economic performance of organizations. American Sociological Review, 61, 674–698.CrossRefGoogle Scholar
  89. Villalonga, B., & Amit, R. (2006). How do family ownership, control, and management affect firm value? Journal of Financial Economics, 80, 385–417.CrossRefGoogle Scholar
  90. Walker, G., Kogut, B., & Shan, W. (1997). Social capital, structural holes and the formation of an industry network. Organization Science, 8(2), 109–126.CrossRefGoogle Scholar
  91. Walters, B. A., Kroll, M., & Wright, P. (2010). The impact of TMT board member control and environment on post-IPO performance. Academy of Management Journal, 53, 572–595.CrossRefGoogle Scholar
  92. Wan, D., & Ong, C. H. (2005). Board structure, process and performance: Evidence from public-listed companies in Singapore. Corporate Governance: An International Review, 13(2), 277–290.CrossRefGoogle Scholar
  93. Westhead, P. (1995). Survival and employment growth contrasts between types of owner-managed high technology firms. Entrepreneurship Theory and Practice, 20(1), 5–27.Google Scholar
  94. Wijnberg, N. M. (2000). Normative stakeholder theory and Aristotle: The link between ethics and politics. Journal of Business Ethics, 25, 329–342.CrossRefGoogle Scholar
  95. Wu, J. (2004). Market economy should watch out for crony capitalism. Decision and Information, 1, 31–33. (in Chinese).Google Scholar
  96. Xin, K. R., & Pearce, J. L. (1996). Guanxi: Good connections as substitutes for institutional support. Academy of Management Journal, 39, 1641–1658.CrossRefGoogle Scholar
  97. Zhang, Y., & Zhang, Z. (2006). Guanxi and organizational dynamics in China: A link between individual and organizational levels. Journal of Business Ethics, 67, 375–392.CrossRefGoogle Scholar
  98. Zimmerman, M., & Zeitz, G. (2002). Beyond survival: Achieving new venture growth by building legitimacy. Academy of Management Review, 27(3), 414–431.Google Scholar

Copyright information

© Springer Science+Business Media Dordrecht 2014

Authors and Affiliations

  1. 1.Singapore Management UniversitySingaporeSingapore
  2. 2.China Europe International Business School (CEIBS)ShanghaiChina

Personalised recommendations