Politically connected directors and firm value: Evidence from forced resignations in China |
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| Institution: | 1. University of International Business and Economics, Beijing 100029, China;2. Renmin University of China, Beijing 100872, China;3. University of Florida, United States;4. Western Kentucky University, United States;1. University of Massachusetts Lowell, 1 University Ave., Pasteur Hall 224, Lowell, MA, 01854, United States;2. Center for Accounting, Finance and Institute, Business School, Sun Yat-Sen University, 135 Xingang Rd., 510275, China;3. Advanced Training Center, State Grid Corporation of China, No. 18 Xixiaokou Rd., Haidian District, Beijing 100192, China;4. University of Massachusetts Lowell, 1 University Ave., Pasteur Hall 216, Lowell, MA, 01854, United States;1. School of Accounting and Finance, Hong Kong Polytechnic University, Hong Kong;2. Lee Shau Kee School of Business and Administration, Open University of Hong Kong, Hong Kong |
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| Abstract: | The Central Committee of the Communist Party in China issued the No. 18 Document on Oct 30, 2013 to ban government officials from taking any positions in Chinese firms. Using this decision as a unique natural experiment, we examine the causal relation between political connections and firm valuation. We find that the value of firms with politically connected directors drops significantly upon the announcements of the new rule and the resulting director resignations. Furthermore, the decline in valuation is more pronounced when a firm is in a regulated industry, and when a departing director is of vital importance for building and maintaining political connections. Moreover, non-state-owned enterprises suffer more loss of value than their state-owned peers following the resignations of politically-connected directors. Finally, firms exhibit insignificant value loss when their departing directors are of less political importance in allocating resources. These results suggest that hiring politically connected directors has a positive effect on firm valuation in China. |
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| Keywords: | Political connections Firm value Board of directors |
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