Political Connection, Abnormal Investment, and Firm Performance
63 Pages Posted: 19 Aug 2012 Last revised: 3 Jun 2022
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
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