Political Control and Performance in China's Listed Firms

Posted: 10 Jun 2005

See all articles by Eric C. Chang

Eric C. Chang

University of Hong Kong - School of Business

Sonia M. L. Wong

University of Hong Kong

Abstract

The performance implications of the involvement of grassroots local party committees of the Chinese Communist Party (CCP) in the decision making of China's listed firms are investigated. First, we show that the decision-making power of local party committees relative to the power of the largest shareholders is associated positively with firm performance. This result suggests that party control restrains the largest shareholders from expropriation but that the existing level of party control is insufficient to control the largest shareholders. Second, we show that the decision-making power of local party committees relative to managers is associated negatively with firm performance. This result suggests that the political costs associated with party control over managers are more detrimental to firm performance than are agency problems and that the existing level of party control over managers is excessive. On balance, our results indicate that the existing level of party control is excessive and that reducing the decision-making power of local party committees would improve the performance of China's listed firms.

Keywords: Political control, agency problems, corporate governance, China's listed firms, transitional economies

JEL Classification: P26, P31, G38

Suggested Citation

Chang, Eric Chieh C. and Wong, Sonia M. L., Political Control and Performance in China's Listed Firms. Journal of Comparative Economics, Vol. 32, No. 4, December 2004. Available at SSRN: https://ssrn.com/abstract=740286

Eric Chieh C. Chang (Contact Author)

University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Sonia M. L. Wong

University of Hong Kong ( email )

1021, KKL Building
Pokfulam Road
Hong Kong
China

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