Political favouritism and investment efficiency

Yunsen Chen, Chenyu Cui, Ting Yang and Xin Zhang

Pacific-Basin Finance Journal, 2020, vol. 61, issue C

Abstract: Using hand-collected data on the birthplaces and working experiences of the highest-ranking politicians in China's provinces, we identify cities favoured by the politicians and examine the impact of political regional favouritism on the investment efficiency of firms located in the favoured cities. We find that such favouritism is associated with significantly less efficient corporate investment, and the deviation from the optimal investment mainly stems from severe overinvestment. We explore how the impact of regional favouritism on corporate investment efficiency varies with the region's progress in marketization, and find that a higher degree of marketization reduces the strength of the relation between political favouritism and investment efficiency. We further identify a possible channel through which favouritism leads to overinvestment, and find that favoured firms have better access to debt financing and receive more government subsidies.

Keywords: Regional favouritism; Investment efficiency; Access to finance (search for similar items in EconPapers)
JEL-codes: G31 G38 H7 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:61:y:2020:i:c:s0927538x18300659

DOI: 10.1016/j.pacfin.2018.08.012

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