Politically connected directors and firm value: Evidence from forced resignations in China

Xuesong Tang, Yan Lin, Qing Peng, Jun Du and Kam C. Chan

The North American Journal of Economics and Finance, 2016, vol. 37, issue C, 148-167

Abstract: The Central Committee of the Communist Party in China issued the No. 18 Document on Oct 30, 2013 to ban government officials from taking any positions in Chinese firms. Using this decision as a unique natural experiment, we examine the causal relation between political connections and firm valuation. We find that the value of firms with politically connected directors drops significantly upon the announcements of the new rule and the resulting director resignations. Furthermore, the decline in valuation is more pronounced when a firm is in a regulated industry, and when a departing director is of vital importance for building and maintaining political connections. Moreover, non-state-owned enterprises suffer more loss of value than their state-owned peers following the resignations of politically-connected directors. Finally, firms exhibit insignificant value loss when their departing directors are of less political importance in allocating resources. These results suggest that hiring politically connected directors has a positive effect on firm valuation in China.

Keywords: Political connections; Firm value; Board of directors (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:37:y:2016:i:c:p:148-167

DOI: 10.1016/j.najef.2016.04.001

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