Ownership and the Value of Political Connections: Evidence from China

Research has found that political connectedness can have both positive and negative effects on firm value. To resolve these mixed findings, we investigate the impact of political ties conditional on ownership for a sample of Chinese firms over the period 1999–2006. We find that private firms with politically connected managers have a higher value and obtain more government subsidies than those without connected managers, whereas local state‐owned enterprises with connected managers have a lower value and employ more surplus labour than those without connected managers. Our results indicate that the effect of political ties is subject to firm ownership.     

Government Intervention and Investment Comovement: Chinese Evidence

This study examines whether government intervention affects corporate investment comovement, and whether this impact varies across firms with different types of ownership. We use a large Chinese sample to investigate these questions, and perform a regional as well as firm‐level analysis. We show that government intervention is positively and significantly associated with investment comovement. We also find that the impact of government intervention on investment comovement is higher and more significant for state‐owned firms than for domestic private and foreign firms. Finally, we show that investment comovement hinders corporate performance for state‐owned and domestic private firms but not for foreign firms.     

Political considerations in the decision of Chinese SOEs to list in Hong Kong

This paper investigates why Chinese state-owned enterprises (SOEs) with strong political connections (i.e., politically connected firms) are more likely to list overseas than non-politically connected firms. We find that connected firms' post-overseas listing performance is worse than that of non-connected firms. This evidence suggests that connected firms' managers list their firms overseas for private (political) benefits. Consistent with this private benefits explanation, we further find that connected firms' managers are more likely to receive political media coverage or a promotion to a senior government position subsequent to overseas listing than domestic listing.     

Rent-seeking incentives, corporate political connections, and the control structure of private firms: Chinese evidence

We examine how the rent-seeking incentives of local government motivate private firms¹ listed in China to establish political connections, and whether such connections lead to more concentrated corporate control structures. Our results show that such firms are more likely to establish political connections in regions in which the local economy is less market-oriented or in which the government has more discretion in allocating economic resources. This is consistent with the notion that the presence of incentives for government officials to engage in rent seeking motivates private firms to look for alternative safeguards through political connections. We also find that the controlling owners of politically connected firms tend to concentrate their shareholdings and dominate the board of directors by occupying the position of either chairman or CEO, which supports the conjecture that a concentrated control structure facilitates rent seeking through political connections and allows the controlling owner to retain all of the benefits arising from connections with politicians.     

Simultaneous Public and Private Provision of Services, Asymmetric Information and Innovation

Public and private provision of a service coexist. There is asymmetric information between the government and the agency providing the public service with respect to the costs, the quality of the service and the innovation effort of the agency. We examine the optimal government design of the funding contracts to induce the agency to reveal its costs and exert high innovation effort. The optimizing behaviour of consumers and private firms generates observable information, which can be used by the government to reduce its information problem. In the optimal contracts, the informational rents of the agency increase with the level of innovation effort that the government induces from the agency. Correlation between public and the private sector costs results in a trade-off in the government's policy between inducing innovation and extracting the informational rent of the agency. To increase the redistribution inherent in the public provision of the service, the government will manipulate the expected profits of the private firms to induce higher innovation effort.     

CEO hometown ties and tax avoidance‐evidence from China's listed firms

This study investigates the effects of CEO hometown ties on corporate tax avoidance. The results show that CEO hometown ties to local government officials have a significantly positive impact on tax avoidance for private firms in China. We also find that the hometown ties effect is more pronounced in cities with weak public governance and in cities whose municipal Party committee secretaries are promoted from the same city, whereas the effect is weak in cities whose municipal Party committee secretaries are transferred from other places. In summary, our results suggest that hometown ties as an important political resource can facilitate connected private firms to obtain more economic resources from government.     

Depoliticization and corporate cash holdings: Evidence from the mandated resignation of directors in China

The 2013 depoliticization regulation (Rule 18) in China mandates government officials to resign from board positions in public firms, terminating firms' political connections established through these directors. Exploiting this regulation as a quasi-experiment, we document that politically connected firms increase their cash holdings 12.7% more than non-connected firms because of these resignations. This pattern is more pronounced among firms that rely more heavily on the government for external resources. Among state-owned firms, the pattern is more evident in firms that are more deeply privatized. In addition, firms that lose political ties experience a significant decline in obtaining bank loans and government subsidies, and they are also slower to adjust their cash holdings toward the optimal level. These findings underscore the role of corporate political linkages in facilitating firms' access to resources that “soften” firms' budget constraints.     

Public corruption and the allocation of government contracts

Public corruption in the government procurement process is rampant and its cost is huge, even among developed countries. Some scholars estimate that about 20%–30% of the values of government projects are lost due to public corruption. In this paper, we examine how public corruption impacts the allocation of U.S. federal contracts. Using the U.S. Department of Justice corruption convictions data and the federal contract data from 2000 to 2018, we find that firms located in more corrupt states receive more federal contract dollars, more important contracts in terms of their contributions to firm revenues, and contracts with higher visibility among federal contractors. We construct an influence/favoritism index that takes into account defense contracts, cost-plus contracts, and multi-year contracts, and document that the index is positively related to corruption levels. These results hold after we conduct several robustness tests, including 2SLS regressions, propensity-score matching analysis, and using alternative corruption measures. Our empirical findings are consistent with the hypothesis that corruption plays an important role in how federal contracts are allocated.     

Optimal contracting with moral hazard and cascading

In this article I identify optimal incentive contracts for managersof firms competing in the product market. Such firms often confrontsimilar decisions and uncertainties. Managers can improve decisionquality by generating private signals through costly effort.However, since signals are likely to be correlated, firms thatdecide later get additional information from the actions ofearlier firms. This impacts effort choice. Decision qualityis also affected if later managers disregard their own signalsand blindly imitate preceding decisions. In a competitive environment,such cascading hurts profits. Contracts that solve both moralhazard and cascading problems typically put more weight on firmprofits, making them expensive. Contacts with more weight ondecision quality are less expensive but result in cascades.Shareholders choose contracts that maximize their net surplus.This results in testable implications about which industriesmay have more convergence in investment choices, greater pay-for-profitsensitivity, larger differences in observed contracts, moreinnovation, larger-size firms, and potential for overcompensation.     

Government contracts and trade credit

This study examines the association between government contracts and firms' use of trade credit. Firms with government contracts may demand less trade credit because of their lower operational risk, higher firm performance, stronger capacity to generate internal funds, and better access to other sources of financing. On the other hand, government contractors could receive more trade credit extensions from suppliers. We examine a sample of U.S. listed firms from 2000 to 2016 and find that firms with government contracts have a lower level of trade credit. We also find that government contractors make quicker payments for trade credit contracts than other firms. Moreover, we provide empirical evidence of government contractors' lower levels of operational risk and higher firm performance, which may enable government contractors to generate adequate internal funds for their operations or to obtain other forms of financing at a lower cost and thus lower their demand for trade credit. Incremental to prior research, our study suggests that having government contracts is one of the factors determining trade credit and firms' financing decisions.     

Political Connections and Corporate Bailouts

We analyze the likelihood of government bailouts of 450 politically connected firms from 35 countries during 1997–2002. Politically connected firms are significantly more likely to be bailed out than similar nonconnected firms. Additionally, politically connected firms are disproportionately more likely to be bailed out when the International Monetary Fund or the World Bank provides financial assistance to the firm's home government. Further, among bailed‐out firms, those that are politically connected exhibit significantly worse financial performance than their nonconnected peers at the time of and following the bailout. This evidence suggests that, at least in some countries, political connections influence the allocation of capital through the mechanism of financial assistance when connected companies confront economic distress.     

政治联系、预算软约束与政府补助的配置效率——基于中国民营上市公司的经验研究

本文以2004～2008年的民营上市公司为样本,实证研究了民营企业的政治联系对预算软约束及政府补助效率的影响。研究发现,政治联系是一把双刃剑:一方面,政治联系的民营企业容易受到政府干预,由此承担了较重的雇员负担,也因此获得了较多的政府补助,从而支持了林毅夫等对预算软约束的政策性负担层面的解释。另一方面,虽然政治联系未直接发挥关系作用,但会增加雇员负担一定时的政府补助。进一步地,在政治联系的民营企业中,政府补助对公司绩效的促进作用显著低于无政治联系的民营企业,揭示了政治联系改变了政府补助的流向,降低了政府补助资金的配置效率。     

Does the type of ownership control matter? Evidence from China’s listed companies

By tracing the identity of large shareholders, we group China’s listed companies into those controlled by state asset management bureaus (SAMBs), state owned enterprises (SOEs) affiliated to the central government (SOECGs), SOEs affiliated to the local government (SOELGs), and Private investors. We argue that these distinct types of owners have different objectives and motivations and this will affect how they exercise their control rights over the firms they invest in. In particular, we contend that private ownership of listed firms in China is not necessarily superior to certain types of state ownership. To test our arguments we investigate the relative efficiency of state versus private ownership of listed firms and the efficiency of various forms of state ownership. The empirical results indicate that the operating efficiency of Chinese listed companies varies across the type of controlling shareholder. SOECG controlled firms perform best and SAMB and Private controlled firms perform worst. SOELG controlled firms are in the middle. The results are consistent with our predictions.     

External social networks and earnings management

Using a sample of U.S. listed firms for the 2000–2017 period, we examine how external social networks of top executives and directors affect earnings management in their firms. We find that well-connected firms are more aggressive in managing earnings through both accruals and real activities and that the results are robust after controlling for internal executive social ties. Using a difference-in-differences approach, we find that earnings management decreases after a socially connected executive or director dies. Additional analysis shows that connections forged by past professional working experiences have a greater impact on earnings management than connections forged by education and other social activities. Moreover, CFO social networks have a greater influence on earnings management than CEO social networks. Finally, we explore the underlying mechanisms, finding that 1) firms that are socially connected to each other show more similarities in their earnings management than firms that do not share a connection, and 2) more connected firms are less likely to incur accounting restatements. Collectively, our findings indicate that the external social networks of top executives and directors are important determinants of both their accrual- and real activity-based earnings management.     

Government Credit,a Double‐Edged Sword: Evidence from the China Development Bank

Using proprietary data from the China Development Bank (CDB), this paper examines the effects of government credit on firm activities. Tracing the effects of government credit across different levels of the supply chain, I find that CDB industrial loans to state‐owned enterprises (SOEs) crowd out private firms in the same industry but crowd in private firms in downstream industries. On average, a $1 increase in CDB SOE loans leads to a $0.20 decrease in private firms' assets. Moreover, CDB infrastructure loans crowd in private firms. I use exogenous timing of municipal politicians' turnover as an instrument for CDB credit flows.     

The role of stock ownership by US members of Congress on the market for political favors

I examine whether stock ownership by politicians helps to enforce noncontractible quid pro quo relations with firms. The ownership by US Congress members in firms contributing to their election campaigns is higher than in noncontributors. This bias toward contributors depends on the financial incentives of politicians and the relation's value. Firms with a stronger ownership–contribution association receive more government contracts. The financial gains from these contracts are economically large. When politicians divest stocks, firms discontinue contributions to the politicians, lose future contracts, and perform poorly. Politicians divest the stocks in contributors, but not in noncontributors, in anticipation of retirement.     

Political Connections and Related Party Transactions: Evidence from Indonesia

This paper examines whether politically connected firms use related party transactions as a tunneling mechanism in Indonesia. We further investigate whether the presence of tunneling compels managers to manage earnings to conceal such expropriation of resources. Our study is motivated by conflicting evidence in the extant literature about the role of political connections and related party transactions. Using data from Indonesia, we document that politically connected firms use related party loans to tunnel resources, and that this effect is more pronounced for firms with government connections. We further document that politically connected firms manage earnings to conceal their tunneling activities. By documenting the role of related party transactions as a specific channel through which connected firms expropriate resources, we enrich the political connection and related party transactions literature.     

Political Connections and Government Subsidies: Evidence from Financially Distressed Firms in China

Previous studies report mixed evidence regarding the effect of political connections on firm value. We seek new evidence in China, an important emerging market with a hallmark of a relationship-based economy. Using financially distressed firms (special treatment or ST firms) as a unique sample, we identify a direct channel through which political connections enhance firm value by showing that politically connected firms receive more government subsidies. Moreover, such effect becomes stronger for state-owned enterprises (SOEs), for firms with a better chance of survival, and after the government implemented a new policy to more strictly enforce the delisting in 2012.     

Board interlocks and the propensity to be targeted in private equity transactions

We examine how board networks affect change-of-control transactions by investigating whether directors’ deal exposure acquired through board service at different companies affect their current firms’ likelihood of being targeted in a private equity-backed, take-private transaction. In our sample of all US publicly traded firms in 2000–2007, we find that companies which have directors with private equity deal exposure gained from interlocking directorships are approximately 42% more likely to receive private equity offers. The magnitude of this effect varies with the influence of directors on their current boards and the quality of these directors’ previous take-private experience, and it is robust to the most likely classes of alternative explanations—endogenous matching between directors and firms and proactive stacking of board composition by management. The analysis shows that board members and their social networks influence which companies become targets in change-of-control transactions.     

Business groups in China

We investigate whether business groups in China act as internal capital markets, in an environment that is characterized by a high level of government intervention, a weak legal system, and an underdeveloped financial market. We study how institutional factors, such as the ultimate owner and level of market development, shape the role of these business groups. We find that business groups help member firms overcome constraints in raising external capital, and that the internal capital market within a business group is more likely to be an alternative financing channel among state-owned firms than among private firms. We also find that the internal capital market is more likely to help those affiliated firms which are private, local government owned relative to those owned by central government, or located in regions with a well-developed institutional environment. We present evidence of the role of business groups in risk sharing among affiliated firms, but find that business group affiliation has no impact on firm accounting performance. This study sheds new light on the theory of the firm and its boundaries, and provides a better understanding of China's rapidly growing economy.