Politically Connected Enterprises: Business Strategy or Agency Problem?

Abstract

This paper investigates what motivates private entrepreneurs to chase political connections (measured as entrepreneurs’ membership of the People’s Congress (PC) or the Chinese People’s Political Consultative Conference (CPPCC)). Whilst achieved political connections contribute little to an enterprise’s profitability, they significantly correlate with an entrepreneur’s self-rated statuses. Moreover, entrepreneurs of enterprises with weaker corporate governance (lower share of the entrepreneur in the enterprise) tend to make larger donations to achieve political connections. Our findings suggest that obtaining political connections may indicate an agency problem rather than a business investment.

Keywords: political connections; agency problem; Corporate social responsibilities; Corporate Governance