The Effect of Political Influence on Corporate Valuation: Evidence from Party-Building Reform in China

56 Pages Posted: 16 Apr 2022 Last revised: 22 Jan 2023

See all articles by Christopher C. Chen

Christopher C. Chen

National Taiwan University - College of Law

Re-Jin Guo

University of Illinois at Chicago - Department of Finance

Lauren Yu-Hsin Lin

City University of Hong Kong (CityU) - School of Law; City University of Hong Kong (CityU) - Centre for Chinese & Comparative Law

Date Written: November 1, 2022

Abstract

The party-building reform in China aims to strengthen the party-state control of firms by formalizing the Chinese Communist Party’s (CCP) role in corporate charters. We employ the reform as an exogenous shock to examine the effect of political influence on corporate valuation in the state-dominated economy. We first develop a hazard model of firms’ responses to the reform and use the predicted hazard rate as a proxy for a firm’s ex ante political influence. We find a positive correlation between firm valuation changes and the predicted hazard rate in the events of party-building reform announcements and a consistent long-term valuation effect based on the difference-in-differences analyses. We also find that the market reacts negatively when firms elect to adopt charter provisions that allow the CCP to control their personnel decisions. Together, our results are consistent with the hypothesis that the effect of party-building reform on a firm’s valuation depends on the trade-off between the benefits from the increased state capture and the costs of state influence in firm governance and that the enhanced political control costs are mitigated for firms with stronger existing political ties. This paper contributes to the literature by introducing a novel and integrated approach to measuring political influence that goes beyond the traditional state ownership measurement and by identifying ex ante political influence as an important factor in corporate valuation.

Keywords: Political Influence, Corporate Valuation, Chinese Economy, State Capture, Corporate Governance

JEL Classification: G3, P26, G38

Suggested Citation

Chen, Christopher Chao-hung and Guo, Re-Jin J. and Lin, Lauren Yu-Hsin, The Effect of Political Influence on Corporate Valuation: Evidence from Party-Building Reform in China (November 1, 2022). Available at SSRN: https://ssrn.com/abstract=4085444 or http://dx.doi.org/10.2139/ssrn.4085444

Christopher Chao-hung Chen

National Taiwan University - College of Law ( email )

No.1, Sec.4, Roosevelt Road
Taipei, 10617, 10617
Taiwan

Re-Jin J. Guo

University of Illinois at Chicago - Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States
312-413-3718 (Phone)

Lauren Yu-Hsin Lin (Contact Author)

City University of Hong Kong (CityU) - School of Law ( email )

Tat Chee Avenue
Kowloon
Hong Kong

HOME PAGE: http://www.cityu.edu.hk/slw/about-school/our-people/dr-lin-lauren-yu-hsin

City University of Hong Kong (CityU) - Centre for Chinese & Comparative Law

83 Tat Chee Avenue
Room P5300, 5th Floor, Academic 1
Kowloon Tong
Hong Kong

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