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Do CEO's political promotion incentives influence the value of cash holdings: Evidence from state-owned enterprises in China

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  • Lou, Xu
  • Qian, Aimin
  • Zhang, Chenyu

Abstract

Our paper examines the effect of CEOs' political promotion incentives on the value of corporate cash holdings using the setting of state-owned enterprises (SOEs) in China. We find that the value of cash holdings is significantly decreased when CEOs in SOEs receive political promotion. This effect is more pronounced when these CEOs are subject to less monetary and equity incentive, more promotion pressure, higher political rank, and less external supervision. Further analysis shows that these CEOs are more likely to engage in social activities and vanity projects rather than paying cash dividends and increasing innovation investments to create shareholder wealth. Overall, our study shows that political promotion incentives bring new agency conflicts between CEOs and shareholders, and these CEOs are driven by personal benefits to exploit cash resource, resulting in a valuation discount for cash holdings.

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  • Lou, Xu & Qian, Aimin & Zhang, Chenyu, 2021. "Do CEO's political promotion incentives influence the value of cash holdings: Evidence from state-owned enterprises in China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:pacfin:v:68:y:2021:i:c:s0927538x21001244
    DOI: 10.1016/j.pacfin.2021.101617
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    Cited by:

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    More about this item

    Keywords

    Political promotion; Value of cash holdings; SOEs; Agency problems;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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