RIS ID
73623
Abstract
Reciprocal relationship, often regarded as mutually beneficial and secure, can actually be destructive and result in inefficiency. We provide evidence of such double-blade by studying the impact of political connection on corporate governance. Private firms in countries where the government controls the allocation of resources have incentives to seek political connections by hiring politicians or ex-politicians as top executives. Such political capital, however, may turn into political constraint when the CEOs fail to perform but use connections to entrench themselves. We take advantage of the unique setting in China to illustrate this argument. We show that politically connected CEOs have significantly weaker performance, longer tenure, lower turnover, and lower turnover-performance sensitivity than non-politically connected CEOs in China's privately controlled firms. Firm performance improvement is also less following forced turnover of the former than the latter. These entrenchment effects are alleviated in firms that are politically secured through alternative connection channels. The overall results suggest that political capital often turns into political constraints causing sizable inefficiency in Chinese private firms.
Publication Details
Ma, L., Ma, S. & Tian, G. G. (2012). Political connection, founder-manager and their impact on tunneling in China's listed firms. 2012 China International Conference in Finance Chongqing, China: China Center for Financial Research, Tsinghua University.