How does political relationship building affect market efficiency? Evidence from China's anti-corruption campaign

Yihong Gao, Xingyu Pan, Na Yuan and Xinwei Zheng

International Review of Financial Analysis, 2025, vol. 103, issue C

Abstract: Building relationships with external stakeholders is essential for business success. The existing literature mentions how relationship building affects financial decisions, while the impact of political relationship building on market efficiency is unclear. This paper employs the difference-in-differences approach (DID) to investigate whether and how interruptions in political relationship building with government officials may affect market efficiency using China's anti-corruption campaign in 2012 as a quasi-natural experiment. The study finds that interruptions in political relationship building caused by the anti-corruption campaign would enhance market efficiency by increasing information quality and reducing noise trading. Cross-sectional tests show that the effect is more pronounced in firms with higher information transparency and lower noise trading. This study enriches the literature on corporate political relationship building and provides a new interpretation of market efficiency in emerging markets in terms of irrational trading.

Keywords: Relationship building; Anti-corruption; Market efficiency; Irrational behavior (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:103:y:2025:i:c:s1057521925003345

DOI: 10.1016/j.irfa.2025.104247

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