Political Turnover, Ownership, and Corporate Investment

47 Pages Posted: 15 Jan 2015

See all articles by Jerry Cao

Jerry Cao

Independent

Brandon Julio

Lundquist College of Business, University of Oregon

Tiecheng Leng

Sun Yat-sen University

Sili Zhou

Fanhai International School of Finance and School of Economics, Fudan University

Date Written: October 15, 2014

Abstract

We examine the impact of political influence and ownership on corporate investment by exploiting the unique way provincial leaders are selected and promoted in China. The tournament-style promotion system creates incentives for new provincial governors to exert their influence over capital allocation, particularly during the early years of their term. Using a neighboring-province difference-in-differences estimation approach, we find that there is a divergence in investment rates between state owned enterprises (SOEs) and non-state owned enterprises (non-SOEs) following political turnover. SOEs experience an abnormal increase in investment by 6.0% in the year following the turnover, consistent with the incentives of a new governor to stimulate investment. In contrast, investment rates for non-SOEs decline significantly post-turnover, suggesting that the political influence exerted over SOEs crowds out private investment. The effects of political turnover on investment are mainly driven by turnovers with less-educated or local-born successors. Finally, we provide evidence that the political incentives around the turnover of provincial governors represent a misallocation of capital as measures of investment efficiency decline post-turnover.

Keywords: Corporate investment, Political turnover, China, SOE, Political uncertainty, Grabbinghand, Crowding out, Investment efficiency.

JEL Classification: G30, G31, G38

Suggested Citation

Cao, Jerry and Julio, Brandon and Leng, Tiecheng and Zhou, Sili, Political Turnover, Ownership, and Corporate Investment (October 15, 2014). Available at SSRN: https://ssrn.com/abstract=2549482 or http://dx.doi.org/10.2139/ssrn.2549482

Jerry Cao

Independent

No Address Available

Brandon Julio

Lundquist College of Business, University of Oregon ( email )

1280 University of Oregon
Eugene, OR 97403
United States

Tiecheng Leng

Sun Yat-sen University ( email )

135 Xingang West Road
Guangzhou, 510275
China

Sili Zhou (Contact Author)

Fanhai International School of Finance and School of Economics, Fudan University ( email )

Room 520, Building 5, 220 Handan Road
Shanghai
China

HOME PAGE: http://siliz.weebly.com/

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