The Value of Political Ties and Market Credibility: Evidence from Corporate Scandals in China
57 Pages Posted: 12 Mar 2013
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: Suggested Citation
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