Political Influence and Corporate Governance: Evidence from Party-Building Reform in China
42 Pages Posted: 15 Jan 2020
Date Written: December 21, 2019
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: Suggested Citation