Political Turnover, Ownership, and Corporate Investment

Jerry Cao (), Brandon Julio (), Tiecheng Leng () and Sili Zhou
Additional contact information
Jerry Cao: Singapore Management University
Brandon Julio: University of Oregon
Tiecheng Leng: Singapore Management University

No 2016-06, RIEI Working Papers from Xi'an Jiaotong-Liverpool University, Research Institute for Economic Integration

Abstract: We examine the impact of political influence and ownership on corporate investment by exploiting the unique way provincial leaders are selected and promoted in China. The tournament-style promotion system creates incentives for new provincial governors to exert their influence over capital allocation, particularly during the early years of their term. Using a neighboring-province difference-in-differences estimation approach, we find that there is a divergence in investment rates between state owned enterprises (SOEs) and non-state owned enterprises (non-SOEs) following political turnover. SOEs experience an abnormal increase in investment by 6.0% in the year following the turnover, consistent with the incentives of a new governor to stimulate investment. In contrast, investment rates for non-SOEs decline significantly post-turnover, suggesting that the political influence exerted over SOEs crowds out private investment. The effects of political turnover on investment are mainly driven by normal turnovers, and turnovers with less-educated or local-born successors. Finally, we provide evidence that the political incentives around the turnover of provincial governors represent a misallocation of capital as measures of investment efficiency decline post-turnover.

Keywords: Corporate investment; Political turnover; China; SOE; Political uncertainty; Grabbing-hand; Crowding out; Investment efficiency (search for similar items in EconPapers)
JEL-codes: G30 G31 G38 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2016-07-08
New Economics Papers: this item is included in nep-cfn, nep-cna, nep-cse, nep-pol, nep-sea and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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