Political capital vs. constraint: evidence of CEO entrenchment in Chinese private firms
Reciprocal relationship, often regarded as mutually beneficial and secure, can be actually destructive and result in inefficiency. We provide evidence of such double-blade by studying the role of political connection in corporations. Private firms in countries where the government controls the allocation of resources have high incentives to seek political connections by hiring politicians or ex-politicians as top executives. Such political capital, however, may turn into political constraints when the CEOs fail to perform but entrench themselves by using their political connections. With comprehensive CEO turnover data for Chinese firms, we show that politically connected CEOs have significantly weaker performance, longer tenure, lower turnover, and lower turnover-performance sensitivity than non-politically connected CEOs, especially in firms that are politically vulnerable. On the other hand, for firms who are able to maintain their political capital through alternative channels, firm performance improves significantly after the forced turnover of the underperformed political connected CEOs. The overall results suggest that there are severe entrenchments of politically connected CEOs in Chinese private firms and such entrenchment causes sizable inefficiency in private sector.