The Value of Political Ties versus Market Credibility: Evidence from Corporate Scandals in China

T.J. Wong, Mingyi Hung () and Fang Zhang
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T.J. Wong: Department of Accounting, The Chinese University of Hong Kong
Mingyi Hung: Department of Accounting, Hong Kong University of Science and Technology
Fang Zhang: Department of Accounting, Hong Kong Baptist University

No 2015-18, HKUST IEMS Working Paper Series from HKUST Institute for Emerging Market Studies

Abstract: This paper compares the value of political ties and market credibility in China by examining the consequence of corporate scandals. We categorize Chinese corporate scandals by whether the scandal is primarily associated with the destruction of i) the firm’s political networks (political scandals), ii) the firm’s market credibility (market scandals), or iii) both (mixed scandals). Consistent with our hypothesis that scandals signaling the destruction of political ties are associated with greater losses in firm value than scandals signaling the destruction of market credibility, we find that the stock market reacts more negatively to political and mixed scandals than to market scandals. In addition, the greater negative market reactions associated with political and mixed scandals are primarily driven by firms that rely more on political networks. We also find that, compared to market scandals, political and mixed scandals lead to larger decreases in operating performance, greater reduction in loans from state-owned banks, and higher departure of political directors.

Keywords: political economy; market credibility; corporate scandals; China (search for similar items in EconPapers)
JEL-codes: G32 G34 G39 O17 P16 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2015-03, Revised 2015-03
New Economics Papers: this item is included in nep-cfn, nep-cna, nep-pol and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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