Depoliticization and corporate cash holdings: Evidence from the mandated resignation of directors in China |
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| Institution: | 1. University of International Business and Economics, China;2. Beijing Foreign Studies University, China;3. Cardiff University, UK;4. Faculty of Business and Economics, University of Hong Kong, Hong Kong;1. Economics and Management School, Center for Macroeconomic Research & Policy Evaluation, Wuhan University, Wuhan 430072, China;2. School of Social Science, Tsinghua University, Beijing 100084, China |
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| Abstract: | 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. |
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