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The effect of political connections on the distribution of firm performance

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  • Li, Xuan
  • Wang, Yanchen

Abstract

Political connections have the potential to redistribute rents toward connected firms, and away from non-connected ones. In this paper, we show that this is indeed the case for Chinese listed firms during 2008–2015. Connected firms (as proxied by college ties between senior management and local leaders) have higher Return on Assets (ROA) and more government subsidies, while non-connected firms experience a significant decline in both ROA and subsidy when executive turnover or political rotation leads to the creation of connected firms in the city. The differential effects on non-connected firms within the same industry versus those in different industries suggest that non-connected firms outside the industry are more adversely affected due to leaders' attempts to mask favoritism with broad industrial policy.

Suggested Citation

  • Li, Xuan & Wang, Yanchen, 2024. "The effect of political connections on the distribution of firm performance," China Economic Review, Elsevier, vol. 88(C).
    • Handle: RePEc:eee:chieco:v:88:y:2024:i:c:s1043951x24001780
    DOI: 10.1016/j.chieco.2024.102289
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    More about this item

    Keywords

    Political connections; Distributional consequences; Firm performance;
    All these keywords.

    JEL classification:

    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • P26 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Property Rights

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