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

44 Pages Posted: 4 Oct 2014

See all articles by Jerry Cao

Jerry Cao

Independent

Xiaofei Pan

University of Wollongong

Meijun Qian

Australian National University (ANU) - College of Business and Economics

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

Date Written: May 23, 2014

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

Suggested Citation

Cao, Jerry and Pan, Xiaofei and Qian, Meijun and Tian, Gary Gang, Political Capital vs. Constraint: Evidence from CEO Turnovers in Chinese Private Firms (May 23, 2014). Available at SSRN: https://ssrn.com/abstract=2500503 or http://dx.doi.org/10.2139/ssrn.2500503

Jerry Cao

Independent

No Address Available

Xiaofei Pan

University of Wollongong ( email )

Northfields Avenue
Wollongong, New South Wales 2522
Australia

Meijun Qian

Australian National University (ANU) - College of Business and Economics ( email )

Canberra
Australia

Gary Gang Tian (Contact Author)

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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