Anti-Corruption Reforms and Shareholder Valuations: Event Study Evidence from China

Abstract

Chinese share prices rose sharply on the Politburo's Dec. 4th, 2012, announcement of its Eight-point Regulation, an uncharacteristically detailed and concrete Party policy, initiating an extensive anti-corruption campaign and announced surprisingly soon after a change in leadership. The reaction is uniformly positive for state-owned enterprises (SOEs), but heterogeneous across non-SOEs. The reaction is more positive for non-SOEs in provinces with more developed market institutions and with higher prior productivity, greater external financing dependence, and greater growth potential. A non-SOEs prior spending on entertainment and travel costs (ETC), a proxy for investment in "connections", correlates negatively with the share price changes of firms based in provinces with weak market institutions. We posit that limiting corruption cuts the valuations of these non-SOEs by limiting their ability to utilize "connections" where these are more important. SOEs are well-connected in any case, and their ETC may reflect their top insiders' perks consumption or self-dealing. Reforms that limit this boost SOEs' valuations. Overall, these results are consistent with investors expecting the reforms to be meaningful and limiting corruption to be more valuable if prior reforms have strengthened market forces.