Political Connection PPT 湖北工业大学

A report conducted in 2010 revealed that Chinese public firms recruited 1599 former government officers, of which about 500 were independent directors.
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Motivation

The importance of social capital
“social capital is the expected collective or economic benefits derived from the preferential treatment and cooperation between individuals and groups… “ Political connections (PC)
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Potential Contributions

Our findings are based on a composite score measure that captures the relative strength of PC of all top executives and board members. It provides additional empirical evidence that PC negatively affect financial performance. It shows a positive relation between PC and corporate overinvestments, which partially explains the negative effect of PC on performance. It adds to board governance literature and capital structure literature.
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Literature Review 1

Political connections bring benefits

government contracts (Goldman, Rocholl and So, RF 2013) favorable regulations (Agrawal and Knoeber, JLE 2001) easier access to financial resources (Khwaja and Mian, QJE 2005; Faccio, AER 2006) higher chance to be bailed out in economics distress (Faccio, Masulis and McConnell, JF 2006)

Political connections leads to higher firm value.
Roberts (AJPS 1990); Fisman (AER 2001); Faccio (AER 2006); Goldman, Rocholl and So ( RFS 2009).
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Literature Review 2

Political connections lead to investment inefficiency in SOEs.
Chen et al. (JCF 2011)
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Political Connections in Chinese Firms

State Owned Enterprises (SOEs) Private firms are eager to establish close relationships with government by hiring ex-politicians as executives and directors, or, actively participating in politics as members of National People’s Congress (NPC) and the Chinese People's Political Consultative Conference (CPPCC).
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Data Source

China Stock Market & Accounting Research (CSMAR) database According to GICS（全球行业分类标准）, 103 publicly traded real estate firms in China The period of 1998–2012
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Other Variables




Long-Term Loan, Short-term Loan, Total Loan, Liability Return on Asset (ROA) LogSales, LogAsset, Expense, LogEmployee, Cash, Dividend Asset Collateral Value is net property, plant, and equipment divided by total asset. Tobin’s q is the book value of assets minus the book value of common equity plus the market value of common equity divided by total asset. SOE is a dummy variable that equals one if the Chinese government is the controlling shareholder of the firm and zero otherwise. Board Size , Independent Director Except for PC, SOE, and Dividend, we winsorize all other variables at the 2nd and 98th percentiles.
Su and He (2010); Fan, Wong and Zhang (2007); Chen et al. (2011)
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Our PC Variable

For each firm and each year, we identify all board members and chief officers. We verify the highest job position and title in the government, the NPC, and the CPPCC. Based on the rank of his/her highest political position, we assign a value (0-7) to a person. (7-副部级及以上官员；6-正 厅级；5-副厅级；4-正处级；3-副处级；2-正科级；1-副科级及 以下, 0-没有在体制中工作过) We sum all values and obtain an aggregate score, PC.

Political connections leads to better performance.
Boubakri, Cosset and Saffar (JFR 2012); Johnson and Mitton (JFE 2003); Li et al. (JDE 2008); Su and He (JBE 2010)

Political connections do not promote profit or operating efficiency.
Park and Luo (SMJ 2001)

Politically connected firms underperform.
Fan, Wong and Zhang (JFE 2007); Boubakri, Cosset and Guedhami (JBF 2009); Faccio (FM 2010);

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Main Findings

Political connections are negatively related to ROA. Political connections are positively related to long-term loans.


Political connections are positively related to the probability of overinvestment.


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Measuring PC in Other Studies

A multifaceted construct that includes vertical connections with governments, industrial departments, and other regulatory authorities such as taxation bureaus, banks, and commercial administration bureaus.
Political Connection, Overinvestment and Firm Performance
Leng Ling Xiaorong Zhou Quanxi Liang Pingping Song Haijian Zeng Georgia College & State University Southwestern University of Finance and Economics Guangxi University Georgia Gwinnett College Guangxi University
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Real Estate Industry in China
Year 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 Firm 89,859 88,419 85,218 80,407 87,562 62,518 58,710 56,290 59,242 37,123 32,618 29,552 27,303 25,762 24,378 Employee 2,386,772 2,256,964 2,091,147 1,949,295 2,100,362 1,719,666 1,600,930 1,516,150 1,585,428 1,205,355 1,134,009 1,062,319 971,942 880,300 825,900 Investment (100 million RMB) 71,804 61,797 48,259 36,242 31,203 25,289 19,423 15,909 13,158 10,154 7,791 6,344 4,984 4,103 3,614 Sales (100 million Asset (100 million RMB) RMB) 64,456 351,859 58,589 284,359 52,721 224,467 44,355 170,184 25,068 144,834 29,889 111,078 20,826 88,398 17,576 72,194 10,376 61,789 7,956 40,486 6,032 33,043 4,863 28,567 3,935 25,186 2,988 18,745 2,514 19,526 Price / meter2 (RMB) 5,791 5,357 5,032 4,681 3,800 3,864 3,367 3,168 2,778 2,359 2,250 2,170 2,112 2,053 2,063
land supply bank loans
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Research Questions

How do political connections impact firm performance? In which aspects do political connections help business?

Extant literature provides mixed evidence of the effect of PC on firm performance.

The real estate industry in China provides a unique setting to examine the role of PC in business environment.
Park and Luo (2001)

Owner/CEO/Chairman is a member of the Communist Party?
Li et al. (2008)

Owner/CEO/Chairman has ever worked in Chinese political systems?