Does Market Transition Eclipse the Value of Firms’ Political Connections? A Longitudinal Study of Publicly Listed Firms in China

Abstract:     
Has the value of firms’ political connections declined during the course of China’s market transition? Some argue that China has experienced a tipping point after which the importance of political connections in conducting business has diminished, whereas others expect the value of political connections to remain resilient. Based on publicly listed firms in the Chinese stock market from 1992 to 2007, our data show that political connections enhanced firm value more substantially as economic liberalization progressed over time. We argue that, in the absence of political reforms, economic reforms actually strengthen, rather than eclipse, the value of political connections for firms. This effect is more pronounced in more competitive markets than in less competitive ones and for smaller firms than for larger firms.

Number of Pages in PDF File: 36

Keywords: political connection, firm value, market transition, political reform

JEL Classification: G32, G34, G38

working papers series