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Vertical Integration, Institutional Determinants and Impact: Evidence from China

Joseph P.H. Fan, Jun Huang, Randall Morck and Bernard Yeung

No 14650, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Where legal systems and market forces enforce contracts inadequately, vertical integration can circumvent these transaction difficulties. But, such environments often also feature highly interventionist government, and even corruption. Vertical integration might then enhance returns to political rent-seeking aimed at securing and extending market power. Thus, where political rent seeking is minimal, vertical integration should add to firm value and economy performance; but where political rent seeking is substantial, firm value might rise as economy performance decays. China offers a suitable background for empirical examination of these issues because her legal and market institutions are generally weak, but nonetheless exhibit substantial province-level variation. Vertical integration is more common where legal institutions are weaker and where regional governments are of lower quality or more interventionist. In such provinces, firms led by insiders with political connections are more likely to be vertically integrated. Vertical integration is negatively associated with firm value if the top corporate insider is politically connected, but weakly positively associated with public share valuations if the politically connected firm is independently audited. Finally, provinces whose vertical integrated firms tend to have politically unconnected CEOs exhibit elevated per capita GDP growth, while provinces whose vertically integrated firms tend to have political insiders as CEOs exhibit depressed per capita GDP growth.

JEL-codes: G38 L22 P14 P16 (search for similar items in EconPapers)
Date: 2009-01
New Economics Papers: this item is included in nep-bec, nep-cna, nep-dev and nep-tra
Note: CF
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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