Connections as Liabilities: The Cost of the Politics-Business Revolving Door in China
63 Pages Posted: 20 Dec 2019 Last revised: 23 Feb 2021
Date Written: February 23, 2021
Established literature recognizes revolving-door hiring as a means for firms to obtain protection against political risks and advance business interests. This paper theorizes a cost of the political-business revolving door, which transmits uncertainty from the political system to firms in turbulent times. 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 to revolving-door recruitment turn negative during this period. The cost of revolving door recruitment is larger in areas with high-profile corruption crackdowns and poorer market institutions. In contrast to the conventional corporate governance explanations, the mechanism proposed in this paper emphasizes external perceptions of firms. Analyses of over 1 million equity reports and bank loan records data show that political connections act as a negative signal for investors and lenders, thereby discouraging investment.
Keywords: Political-Business Revolving Door; Political Risk; Firm Performance; Anticorruption campaign; China
JEL Classification: D3; P26
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