Connections as Liabilities: The Cost of the Politics-Business Revolving Door in China

Forthcoming in British Journal of Political Science

80 Pages Posted: 20 Dec 2019 Last revised: 10 Nov 2022

Date Written: July 31, 2022

Abstract

The established literature has recognized revolving-door hiring as a means for firms to obtain protection against political risks and advance their business interests. This paper theorizes about the cost of the revolving door between politics and business, which transmits uncertainty during turbulent times from the political system to firms. I empirically estimate the cost of revolving-door recruitment for over 3,000 publicly listed firms in the early years of a major corruption crackdown in China. I show that firm-level returns on revolving-door recruitment become negative during this period. In contrast to conventional corporate governance explanations, the mechanism proposed in this paper emphasizes the external perceptions and financing of firms. Text analyses of over 1 million equity reports and bank loan record data show that political connections act as a negative signal to external financiers, thereby discouraging external financing.

Keywords: Political-Business Revolving Door; Political Risk; Firm Performance; Anticorruption campaign; China

JEL Classification: D3; P26

Suggested Citation

Li, Zeren, Connections as Liabilities: The Cost of the Politics-Business Revolving Door in China (July 31, 2022). Forthcoming in British Journal of Political Science, Available at SSRN: https://ssrn.com/abstract=3497962 or http://dx.doi.org/10.2139/ssrn.3497962

Zeren Li (Contact Author)

Yale University ( email )

New Haven, CT 06510
United States

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