Political Influence and Corporate Governance: Evidence from Party-Building Reform in China

42 Pages Posted: 15 Jan 2020

See all articles by Lauren Yu-Hsin Lin

Lauren Yu-Hsin Lin

City University of Hong Kong (CityUHK) - School of Law; City University of Hong Kong (CityUHK) - Centre for Chinese & Comparative Law

Re-Jin Guo

University of Illinois at Chicago - Department of Finance

Christopher C. Chen

Singapore Management University School of Law

Date Written: December 21, 2019

Abstract

We focus on the recent Dangjian (“party-building”) reform, a major measure taken by the Chinese Communist Party (CCP) to strengthen its leadership position in Chinese state-owned enterprises (SOEs). We hypothesize that, given the unique governance and ownership structure of Chinese firms, there is a trade-off between the political costs and benefits of the mitigated agency problems. We report negative investor reactions to privately-owned enterprises (POEs) after the Dangjian reform announcements, consistent with the hypothesis that strengthening party control over business is harmful to business efficacy and firm value. We also find evidence that the increased risks of political influence due to the reform undermine the value of SOEs that are considered more independent of political power (i.e., those under corporate pyramids or cross-listed on a foreign market). In addition, the market reacted negatively when firms incorporated the provision to adopt the party’s cadre management principle, which allows the CCP to intervene in firm management.

Keywords: State-owned enterprises, Political influence, Corporate Governance, Event study

JEL Classification: G32, G34

Suggested Citation

Lin, Lauren Yu-Hsin and Guo, Re-Jin J. and Chen, Christopher C., Political Influence and Corporate Governance: Evidence from Party-Building Reform in China (December 21, 2019). Available at SSRN: https://ssrn.com/abstract=3510002 or http://dx.doi.org/10.2139/ssrn.3510002

Lauren Yu-Hsin Lin (Contact Author)

City University of Hong Kong (CityUHK) - School of Law ( email )

Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://www6.cityu.edu.hk/slw/people/people_Yu_Hsin.html

City University of Hong Kong (CityUHK) - Centre for Chinese & Comparative Law

83 Tat Chee Avenue
Room P5300, 5th Floor, Academic 1
Kowloon Tong
Hong Kong

Re-Jin J. Guo

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
312-413-3718 (Phone)

Christopher C. Chen

Singapore Management University School of Law ( email )

55 Armenian Street
Singapore, 179943
Singapore

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