Do Political Connection Disruptions Increase Labor Costs in a Government-Dominated Market? Evidence from Publicly Listed Companies in China

53 Pages Posted: 17 Jan 2020

See all articles by Chunyan Wei

Chunyan Wei

Shanghai University of Finance and Economics

Shiyang Hu

Chongqing University - School of Economy and Business Administration

Feng Chen

University of Toronto - Rotman School of Management

Date Written: December 27, 2019

Abstract

This paper investigates whether the disruption of political connections increases labor costs among Chinese listed firms. Using the Communist Party of China’s Rule No. 18 as an exogenous shock that forces firms to lose their politically connected independent directors, we find that the disruption of political connections is associated with an increase in labor costs (both in terms of aggregate labor costs per firm and average labor costs per employee) and an increase in employee turnover. Such increases do not lead to labor productivity improvements, and cannot be attributed to changes in corporate policies or the composition of labor forces after Rule No. 18. We also find that firms with higher unemployment risk and skilled labor risk increase their labor costs to a larger extent. Our results are robust to alternative labor cost measures, controlling for potential confounding events, and alternative political connection channels. Our study shows an unintended labor market consequence — increases in labor costs — of political connection disruptions for firms that are adversely affected by such disruptions.

Keywords: Political Connection Disruptions; Labor Cost; Labor Productivity; Unemployment Risk; Skilled Labor Risk

JEL Classification: G38; J21; J30; P26

Suggested Citation

Wei, Chunyan and Hu, Shiyang and Chen, Feng, Do Political Connection Disruptions Increase Labor Costs in a Government-Dominated Market? Evidence from Publicly Listed Companies in China (December 27, 2019). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3510417

Chunyan Wei

Shanghai University of Finance and Economics ( email )

No. 111 Wuchuan Road, Shanghai
Room 407, School of Accountancy
Shanghai, CA Shanghai 200433
China
+8617317900153 (Phone)

Shiyang Hu (Contact Author)

Chongqing University - School of Economy and Business Administration ( email )

No.174 Shazhengjie
Shapingba
Chongqing, Chongqing 400044
China

Feng Chen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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