Political Connections as Liabilities: The Effect of Political Risk on Firm-Level Returns

55 Pages Posted: 20 Dec 2019 Last revised: 31 Jan 2020

See all articles by Zeren Li

Zeren Li

Duke University, Department of Political Science

Date Written: January 28, 2020

Abstract

Firms around the world benefit from building connections with politicians. In this paper, I develop a theory of political risk to account for the conditionality of returns to political connections. I theorize that the uncertain status of public officials is a political risk that undermines the profitability of politically connected firms. To test this theory, I analyze how China's ongoing anti-corruption campaign impacts the returns of over 3,000 Chinese publicly listed firms. I find that firm-level returns to political connections decline dramatically following the start of the campaign. Additional analyses rule out other alternative explanations and provide evidence on the preferential benefits mechanism.

Keywords: Political Connections; Political Risk; Financial Market; Anti-corruption Campaign; China

JEL Classification: D3; P26

Suggested Citation

Li, Zeren, Political Connections as Liabilities: The Effect of Political Risk on Firm-Level Returns (January 28, 2020). Available at SSRN: https://ssrn.com/abstract=3497962 or http://dx.doi.org/10.2139/ssrn.3497962

Zeren Li (Contact Author)

Duke University, Department of Political Science ( email )

Durham, NC 27708
United States

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