‘Princelings’: Exploring a Special Type of Political Connection in Chinese Listed Firms

77 Pages Posted: 28 Jun 2017 Last revised: 4 Sep 2017

See all articles by Chen Xiaoqi

Chen Xiaoqi

Massey University; Massey university

Jianguo Chen

Massey University - School of Economics and Finance

Carolyn G. Wirth

Massey University - School of Economics and Finance

Date Written: June 19, 2017

Abstract

In this study, we identify a new type of political connection, referred to as “princelings,” who are the descendants of prominent and influential senior communist officials in the People’s Republic of China. We develop a theory of “Golden hens versus Chickens” to describe the major features of these connected firms. Consistent with the theory, compared to unconnected firms, “princelings” connected firms (PCFs) stockpile disproportionately larger retained earnings but pay lower cash dividends. We find that such behaviour is not due to either investment or precautionary motives. By examining the components of retained earnings, we identify a discrepancy in the accounting for changes in retained earnings, newly defined as “grey usage,” which potentially represents a newly identified means of tunnelling. Relative to matching firms, PCFs have higher average grey usages on retained earnings by CNY 4.68 million. The findings highlight for investors in PCFs the potential increased risk of expropriation through grey usages.

Keywords: Political Connection, Tunneling, Operating Performance, China

JEL Classification: G32, G35, G38

Suggested Citation

Xiaoqi, Chen and Xiaoqi, Chen and Chen, Jianguo and Wirth, Carolyn G., ‘Princelings’: Exploring a Special Type of Political Connection in Chinese Listed Firms (June 19, 2017). Available at SSRN: https://ssrn.com/abstract=2991349 or http://dx.doi.org/10.2139/ssrn.2991349

Chen Xiaoqi (Contact Author)

Massey University ( email )

Private Bag 11 222
Palmerston North, Manawatu 4442
New Zealand

Massey university ( email )

Private Bag 11 222
Palmerston North, Manawatu 4442
New Zealand

Jianguo Chen

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 30974
New Zealand

Carolyn G. Wirth

Massey University - School of Economics and Finance ( email )

Private Bag 11-222
Palmerston North, 4442
New Zealand

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