The Value of Political Connections in China: Government Officials on the Board of Directors

53 Pages Posted: 9 Nov 2016  

Jijian Fan

UC Santa Cruz

Date Written: October 17, 2016

Abstract

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

Suggested Citation

Fan, Jijian, The Value of Political Connections in China: Government Officials on the Board of Directors (October 17, 2016). Available at SSRN: https://ssrn.com/abstract=2866559 or http://dx.doi.org/10.2139/ssrn.2866559

Jijian Fan (Contact Author)

UC Santa Cruz ( email )

Santa Cruz, CA 95064
United States

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