Purifying Political Ecology: How Anti-Corruption Campaign Affects Capital Structure Decisions?

Abstract

This study examines the role of the anti-corruption campaign in capital structure decisions for Chinese listed firms using investigations of senior officials from 2007 to 2019. We find a positive effect of the anti-corruption campaign on the firm’s leverage adjustment speed, consistent with the notion that purified political ecology helps reduce financial frictions in the capital market. The positive relationship is alleviated for firms located in cities ruled by the investigated officials as they face a loss of political resources and financing advantages. Financial frictions, agency costs, and credit reallocation are identified as three possible channels affecting capital structure dynamics. Further evidence suggests that the anti-corruption campaign reduces the deviation from the optimal capital structure, facilitates external financing, and increases executive incentives.

Keywords: anti-corruption campaign, capital structure adjustment, political connection

JEL Classification: G10, G11, G14