What do private firms do after losing political capital? Evidence from China

Zhimin Li and Lei Cheng

Journal of Corporate Finance, 2020, vol. 60, issue C

Abstract: This paper studies the real effects of losing political capital by exploiting exogenous shocks from the sudden deaths of politically connected independent directors in Chinese firms. Using difference-in-differences estimation, we find that upon losing political capital, a firm boosts its physical capital expenditures by 28%, or 2.93 percentage points, which is an order of magnitude larger than estimates from the United States. The loss of political capital leads to a decrease in the economic benefits a firm can obtain, in terms of bank loans, tax benefits, and government subsidies, and an increase in its production costs. Our evidence suggests that private firms use physical capital investment as a substitute for political capital.

Keywords: Political capital; Physical capital; Sudden death; Retired government official; Independent director (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:60:y:2020:i:c:s0929119919309356

DOI: 10.1016/j.jcorpfin.2019.101551

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