Political turnovers, ownership, and corporate investment in China

• Main Authors: CAO, Jerry X., BRANDON, Julio, LENG, Tiecheng, ZHOU, Sili
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2016
• Subjects: Corporate investment; Political turnover; China; SOE; Political uncertainty; Grabbing-hand; Crowding out; Investment efficiency; Asian Studies; Corporate Finance; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/6420; https://ink.library.smu.edu.sg/context/lkcsb_research/article/7419/viewcontent/Political_Turnover_Ownership_2016_wp.pdf
• Institution: Singapore Management University

We examine the impact of political influence and ownership on corporate investment by exploiting the unique way provincial leaders are promoted in China. The tournament-style promotion system creates incentives for new governors to exert influence over investment in the early years of their term. We find a divergence in investment rates between state owned enterprises (SOEs) and private firms following political turnover. SOEs increase investment by 6.0% following the turnover while investment rates for private firms decline, suggesting that the political influence exerted over SOEs may crowd out private investment.