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Estimating the value of political connections in China: Evidence from sudden deaths of politically connected independent directors

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  • Cheng, Lei

Abstract

This paper estimates the value of political connections by examining stock price reactions to sudden deaths of retired government officials who were acting as independent directors of private firms in China from 2003 to 2012. Employing an event study, we find that, if a private firm loses political connections because of the sudden death of an independent director who was previously a government official, its stock price drops 3.61% on average within ten trading days. After the loss of political connections, we find that it is possible but infeasible for a private firm to reestablish political connections with the government in a short period of time. Moreover, the sudden death of a retired government official leads to a reduction in the economic benefits (e.g., bank loans, tax preference, and government subsidies) obtained by a private firm, which provides a reasonable explanation for the negative stock price reaction after losing political connections.

Suggested Citation

  • Cheng, Lei, 2018. "Estimating the value of political connections in China: Evidence from sudden deaths of politically connected independent directors," Journal of Comparative Economics, Elsevier, vol. 46(2), pages 495-514.
    • Handle: RePEc:eee:jcecon:v:46:y:2018:i:2:p:495-514
    DOI: 10.1016/j.jce.2017.10.001
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    More about this item

    Keywords

    Political connection; Sudden death; Retired government official; Independent director; Market calue;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • P26 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Property Rights
    • P31 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Socialist Enterprises and Their Transitions

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