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Helping hands or grabbing hands? An analysis of political connections and firm value

Carl R. Chen, Yingqi Li, Danglun Luo and Ting Zhang

Journal of Banking & Finance, 2017, vol. 80, issue C, 71-89

Abstract: We construct a unique political connection index to capture variations in the strength of firm political relations in China. The index incorporates various channels through which a firm's executives, chairperson, directors, and other senior officers are politically connected with government officials and bureaucrats. Overall, there is a negative relation between our index and firm value for the full sample, but such negative relation mainly exists for state-owned enterprises (SOEs) and it becomes positive for non-SOEs. Furthermore, close examination shows an inverted U-shaped relation between political connections and firm value for the full sample in general and for non-SOEs in particular: Firm value increases initially at a lower level of connections and then begins to decrease at a higher level. The findings are consistent with the different business objectives and motivations of SOEs and non-SOEs in seeking political connections. Finally, our findings are robust after controlling for potential endogeneity and using an alternative headcount index construction method.

Keywords: Political connection index; Industry-adjusted Tobin's Q; Rent seeking; Government intervention; Underdeveloped legal system; Planned economy (search for similar items in EconPapers)
JEL-codes: G32 G34 D72 F39 G28 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:jbfina:v:80:y:2017:i:c:p:71-89