Do Bureaucratic Checks Improve Firm Value? Evidence from a Natural Experiment

31 Pages Posted: 27 May 2020

See all articles by Jiafu An

Jiafu An

University of Aberdeen

Seth Armitage

University of Edinburgh - Accounting and Finance

Wenxuan Hou

University of Edinburgh - Business School; University of Edinburgh - Business School; Shanghai Lixin University of Accounting and Finance

Xianda Liu

University of Edinburgh, Business School

Date Written: April 29, 2020

Abstract

This paper studies the impact of bureaucratic checks on firm value using the revision of the regulations on disciplinary actions of the Communist Party of China (CPC) in 2015 as a natural experiment. We document a positive and substantial market reaction following this unexpected policy change that tightens and formalizes the constraints on bureaucrats’ misconduct. The impact is less pronounced for firms with state controlling shareholders or state ownership, firms having CEOs or directors with CPC memberships, and these operate in regions with better institutional quality. The subsequent revision in 2018 that emphasized political obedience is not associated with positive market reactions. Our results have policy implications for the design of the incentive structure within bureaucratic organizations.

Keywords: Bureaucratic Checks, China, Anti-Corruption, Natural Experiment, Firm Value

JEL Classification: D73, G32, C90

Suggested Citation

An, Jiafu and Armitage, Seth and Hou, Wenxuan and Hou, Wenxuan and Liu, Xianda, Do Bureaucratic Checks Improve Firm Value? Evidence from a Natural Experiment (April 29, 2020). Available at SSRN: https://ssrn.com/abstract=3588383 or http://dx.doi.org/10.2139/ssrn.3588383

Jiafu An

University of Aberdeen ( email )

King's College
Aberdeen
Aberdeen, AB24 3FX
United Kingdom

HOME PAGE: http://www.jiafuan.net

Seth Armitage

University of Edinburgh - Accounting and Finance ( email )

29 Buccleuch Place
Edinburgh, EH8 9JS
United Kingdom
44 131 650 3794 (Phone)

Wenxuan Hou (Contact Author)

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

HOME PAGE: http://www.wenxuanhou.com

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
United Kingdom

HOME PAGE: http://www.wenxuanhou.com

Shanghai Lixin University of Accounting and Finance ( email )

Xianda Liu

University of Edinburgh, Business School ( email )

Edinburgh
United Kingdom

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