The Role of Political Connection on Overinvestment of Chinese Energy Firms

21 Pages Posted: 12 Sep 2019

See all articles by Xiaojun Yu

Xiaojun Yu

City University of Hong Kong (CityUHK)

Yao Yao

City University of Hong Kong (CityUHK)

Huanhuan Zheng

National University of Singapore

Lin Zhang

City University of Hong Kong (CityUHK)

Date Written: July 2019

Abstract

This paper explores the role of political connection on the overinvestment of Chinese energy firms. We argue that political connection can act as a “helping hand” that enables energy firms to obtain more government support to invest and a “grabbing hand” that forces politically connected energy firms to heavily overinvest for the promotion benefit of local politicians. Our analysis shows that overinvestment of an energy firm is positively affected by its political connection. In terms of the “helping hand” effects, we find that politically connected energy firms are more likely overinvest when they receive more government subsidy. In terms of the “grabbing hand” effects, we show that local politician is more likely to force energy firms to overinvest if the politician is approaching the 65-year-old promotion line. Although firms are less likely to overinvest during the economic downturn, local politician shapes the investment decision of energy firms through the “grabbing hand” effects.

Keywords: political connection, overinvestment, Chinese energy firms, promotion incentive

JEL Classification: D22, M51, Q48

Suggested Citation

Yu, Xiaojun and Yao, Yao and Zheng, Huanhuan and Zhang, Lin, The Role of Political Connection on Overinvestment of Chinese Energy Firms (July 2019). Energy Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3450453

Xiaojun Yu

City University of Hong Kong (CityUHK) ( email )

Tat Chee Avenue
Hong Kong
Hong Kong

Yao Yao

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

Huanhuan Zheng

National University of Singapore ( email )

1E Kent Ridge Road
NUHS Tower Block Level 7
Singapore, 119228
Singapore

Lin Zhang (Contact Author)

City University of Hong Kong (CityUHK) ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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