Political Capital vs. Constraint: Evidence from CEO Turnovers in Chinese Private Firms

Abstract

Previous theoretical and empirical studies suggest that CEOs’ political connections are valuable to firms. We examine whether such connections become constraints if the expected political capital fails to materialize and the firm lacks other type of political power in place. Using a sample of listed firms in China, we show that politically connected CEOs in privately controlled (i.e., not state-owned) firms have longer tenure, lower turnover, and weaker turnover-performance sensitivity than non-politically connected CEOs. Further identification tests show that these turnover patterns are not consistent with alternative explanations for turnover patterns such as superior managerial ability or reduction in managerial myopia. The turnover patterns are less pronounced in firms that have alternative political power, such as connected boards or state ownership. Following the turnover of politically connected CEOs, performance improves only for the state-owned firms. Our results call for new theories that comprehend both values and costs of political connection.

Keywords: Political connection, CEO turnover sensitivity, performance, financing costs

JEL Classification: G32, G34, G38