Political uncertainty and allocation of decision rights among business groups: Evidence from the replacement of municipal officials

Mangmang Li, Yuqiang Cao, Meiting Lu and Hongjian Wang

Pacific-Basin Finance Journal, 2021, vol. 67, issue C

Abstract: A firm trades off information transfer costs and agency costs to determine the distribution of decision rights to lower-level management. Using the replacement of municipal officials as an exogenous shock of political uncertainty, we find a business group is more likely to delegate decision rights of cash resources to subsidiaries when political uncertainty is high. The association is only evident among non-state-owned-enterprises (non-SOEs) and not SOEs. Additional tests show that the delegation of decision rights is more pronounced among firms with weak internal control and those located in cities where local governments have replaced their party secretary. We also find that firm decentralization can enhance investment efficiency and the marginal value of cash in the presence of high political uncertainty. Overall, our findings support the decentralization theory, and provide causal evidence on how political uncertainty influences allocation of decision rights among listed firms in an emerging economy with large state ownership.

Keywords: Political uncertainty; Information transfer costs; Decision rights; Decentralization theory (search for similar items in EconPapers)
JEL-codes: G34 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927538X21000482
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:67:y:2021:i:c:s0927538x21000482

DOI: 10.1016/j.pacfin.2021.101541

Access Statistics for this article

Pacific-Basin Finance Journal is currently edited by K. Chan and S. Ghon Rhee

More articles in Pacific-Basin Finance Journal from Elsevier
Bibliographic data for series maintained by Catherine Liu ().