Politically Motivated Corporate Decisions: Evidence from China
51 Pages Posted: 29 Feb 2016 Last revised: 7 Feb 2019
Date Written: January 29, 2019
Periodically, Chinese province heads compete for promotions to national congresses. We document pervasive corporate decision-making cyclicality, synchronized with political cycles: firms increase tax-payments by 13.6% one-year before elections and investments by 6% two-years before. Cyclicality is necessary to “survive,” but insufficient to “win,” and weaker in economically weak (strong) provinces, where politicians are rarely (often) promoted. Chinese investors value promotions and politically motivated corporate activities more than other investors, e.g., in Hong Kong. We provide theoretical justification for promotion tournaments, predicting our empirical findings. We contribute to better understanding of the influence of political calendars and incentives on economic activity.
Keywords: Politically Motivated Corporate Decisions, Corporate Investments, Taxes, Agency, China
JEL Classification: G30, G18, G38, D72
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