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Vertical Integration, Institutional Determinants and Impact: Evidence from China

54 Pages Posted: 5 Mar 2008  

Joseph P. H. Fan

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Jun Huang

Shanghai University of Finance and Economics

Randall Morck

National Bureau of Economic Research (NBER); University of Alberta - Department of Finance and Statistical Analysis

Bernard Yin Yeung

National University of Singapore - Business School

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2008

Abstract

In environments where the legal system and market disciplinary forces are weak to enforce contracts, vertical integration is a means to overcome transaction difficulties. Yet, these weak institution environments are also characterised by high government interventions and even corruption. Vertical integration can be a means to deal with these burdens or to enhance rent-seeking. These variations in motive for vertical integration lead to nuance in the contribution of integration to firm value and to the overall economy.

China offers a suitable background for empirical examination of these hypotheses: her legal and market institutions are often weak but there are substantial variation across sub-regions. Using Chinese data, we find that vertical integration is more common in regions with weaker legal protection for property rights, poorer local government quality, and greater direct government involvement in the economy. Moreover, companies led by insiders with political connections are more likely to be vertically integrated.

Vertical integration is weakly associated with firm value if the top corporate insider is not politically connected. It is negatively associated with share value if the top corporate insider is politically connected, but positive associated with share value if the firm is independently audited. Finally, integration by non-connected firms is associated with growth in per capita GDP while the opposite is true for integration by the politically connected, which validates the rent-seeking nature of these integrations.

Keywords: Vertical Integration, Rent seeking, Property rights, Government quality

JEL Classification: L22, P14, G38, P16

Suggested Citation

Fan, Joseph P. H. and Huang, Jun and Morck, Randall and Yeung, Bernard Yin, Vertical Integration, Institutional Determinants and Impact: Evidence from China (February 28, 2008). Available at SSRN: https://ssrn.com/abstract=1100335 or http://dx.doi.org/10.2139/ssrn.1100335

Po Hung Joseph P. H. Fan (Contact Author)

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong
(852) 26097839 (Phone)
(852) 26035114 (Fax)

Jun Huang

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, Shanghai 200433
China

Randall K. Morck

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32C Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-5683 (Phone)
780-492-3325 (Fax)

Bernard Yin Yeung

National University of Singapore - Business School ( email )

15 Kent Ridge Drive
BIZ 1 Level 6
Singapore, 119245
Singapore
65 6516 3075 (Phone)
65 6779 1365 (Fax)

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