Political Leadership and Governance Structure
36 Pages Posted: 12 Nov 2020
Date Written: October 20, 2020
This paper examines how changes in local political leadership affects firms’ governance structure. Using a novel data set, I document that following the appointment of a new city-level Chinese Communist Party (CCP) secretary, local firms increase (decrease) the fraction of directors who share a common birthplace with the incoming (departing) secretary. This appears to be a channel through which Chinese firms establish political connections. Firms with a higher percentage of birthplace-connected directors exhibit higher abnormal returns around secretary appointments. These firms enjoy superior accounting performances and attract institutional fund flows. I reject an alternative hypothesis that these directors are appointed to company boards on the "orders" of the politician, rather than actively recruited by firms. Evidence suggest that firms do not consider the sharing of a common jiguan (ancestral home) to be a valid form of political connection.
Keywords: Political Connection, China, Institutional Fund Flow, Board of Directors
JEL Classification: P26, D7, G1, G3
Suggested Citation: Suggested Citation