The Value of Political Connections in China: Government Officials on the Board of Directors
53 Pages Posted: 9 Nov 2016
Date Written: October 17, 2016
Understanding the value of political connections is important for firm decision-making and for social efficiency analysis. I examine this question by estimating the effect of having a politician on the board of directors on a firm’s stock price. A new policy in China (Regulation No.18) forced politicians to resign as directors, providing an exogenous shock to firms’ political connectedness. I create an original data set with the political positions of all independent directors who resigned after 2013. A regression discontinuity design reveals no immediate impact after the announcement of the regulation. However, a difference-in-difference design shows that the loss of high level politicians causes a firm’s stock price to fall in the long run. The analysis exploits heterogeneity in both the number and importance of politicians across firms to identify short-run and long-run effects.
Keywords: Political Connection, Stock Market, Government Official, Independent Director
JEL Classification: G14, G18, G38
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