Political Connection, Abnormal Investment, and Firm Performance

63 Pages Posted: 19 Aug 2012 Last revised: 3 Jun 2022

See all articles by Qiao Liu

Qiao Liu

Peking University - Guanghua School of Management

Wei Luo

Peking University - Guanghua School of Management

Nianhang Xu

Renmin University of China - School of Business

Date Written: December 28, 2015

Abstract

We show that executives in the Chinese listed firms make politically motivated investments to build political ties. We also find that excessive investments are more pronounced in firms that can benefit more from political connections (e.g., private firms and poorly governed firms). Although such investments are largely inefficient, and adversely affect firm performance, we find that political connections allows firm owners/executives to extract private benefits including tunneling resources, fast growth in wealth, and promotion to higher positions. Our results are robust to competing hypotheses, alternative measure of abnormal investments, the propensity score matching method, analysis of alternative samples, and the instrumental variable approach. Our study suggests that understanding the means through which political connections are built helps reconcile the mixed economic effects of political connections.

Keywords: Political motivation, over-investment, corporate governance, firm performance

Suggested Citation

Liu, Qiao and Luo, Wei and Xu, Nianhang, Political Connection, Abnormal Investment, and Firm Performance (December 28, 2015). AAA 2013 Management Accounting Section (MAS) Meeting Paper, Available at SSRN: https://ssrn.com/abstract=2131660 or http://dx.doi.org/10.2139/ssrn.2131660

Qiao Liu

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Wei Luo (Contact Author)

Peking University - Guanghua School of Management ( email )

Room 461 Guanghua Building
Peking University
Beijing, Beijing 100871
China

Nianhang Xu

Renmin University of China - School of Business ( email )

Beijing
China

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