The Value of Political Ties and Market Credibility: Evidence from Corporate Scandals in China

57 Pages Posted: 12 Mar 2013

See all articles by Mingyi Hung

Mingyi Hung

Hong Kong University of Science & Technology (HKUST)

T.J. Wong

University of Sothern California

Fang Zhang

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law

Date Written: March 11, 2013

Abstract

This paper compares the value of political ties and market credibility in China by examining the consequence of corporate scandals. We categorize Chinese corporate scandals by whether the scandal is primarily associated with the destruction of i) the firm’s political networks (political scandals), ii) the firm’s market credibility (market scandals), or iii) both (mixed scandals). Consistent with our hypothesis that scandals signaling the destruction of political ties are associated with greater losses in firm value than scandals signaling the destruction of market credibility we find that the stock market reacts more negatively to political and mixed scandals than to market scandals. In addition, firms involved with political and mixed scandals experience worse stock returns when they rely more on political networks. We also find that, compared to market scandals, political and mixed scandals lead to greater departure of political and affiliated directors and larger decreases in loans from state-owned banks.

Keywords: corporate scandal, political ties, market credibility, China

JEL Classification: G30, M41, K40

Suggested Citation

Hung, Mingyi and Wong, T.J. and Zhang, Fang, The Value of Political Ties and Market Credibility: Evidence from Corporate Scandals in China (March 11, 2013). Available at SSRN: https://ssrn.com/abstract=2231520 or http://dx.doi.org/10.2139/ssrn.2231520

Mingyi Hung (Contact Author)

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

T.J. Wong

University of Sothern California ( email )

701 Exposition Blvd
Los Angeles, CA California 90089
United States

Fang Zhang

Hong Kong Baptist University (HKBU) - Department of Accountancy & Law ( email )

Kowloon Tong, Kowloon
Hong Kong

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