IDEAS home Printed from https://ideas.repec.org/a/eee/reveco/v69y2020icp1056-1070.html
   My bibliography  Save this article

Political connection and the walking dead: Evidence from China's privately owned firms

Author

Listed:
  • He, Qing
  • Li, Xiaoyang
  • Zhu, Wenyu

Abstract

Using a sample of privately owned listed firms in China, we document that firms’ political connections have a positive effect on their likelihood of becoming insolvent and inefficient (which we call zombies or zombie firms). The results are more pronounced for firms that are located in regions with extensive government intervention or weak institutional environment. In addition, for firms without political connections, the presence of zombie firms has larger negative spillover effects on the investment and productivity of healthy firms compared with zombie firms in the same industry. Curiously, such differential negative spillover effects are not observed for firms with political connections.

Suggested Citation

  • He, Qing & Li, Xiaoyang & Zhu, Wenyu, 2020. "Political connection and the walking dead: Evidence from China's privately owned firms," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 1056-1070.
    • Handle: RePEc:eee:reveco:v:69:y:2020:i:c:p:1056-1070
    DOI: 10.1016/j.iref.2018.12.007
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1059056018310670
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.iref.2018.12.007?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Tianbiao Zhu, 2015. "International Context and China’s Government-Business Relations," Economic and Political Studies, Taylor & Francis Journals, vol. 3(2), pages 3-29, July.
    2. Shleifer, Andrei & Vishny, Robert W., 1989. "Management entrenchment : The case of manager-specific investments," Journal of Financial Economics, Elsevier, vol. 25(1), pages 123-139, November.
    3. Piotroski, Joseph D. & Zhang, Tianyu, 2014. "Politicians and the IPO decision: The impact of impending political promotions on IPO activity in China," Journal of Financial Economics, Elsevier, vol. 111(1), pages 111-136.
    4. Fan, Joseph P.H. & Wong, T.J. & Zhang, Tianyu, 2007. "Politically connected CEOs, corporate governance, and Post-IPO performance of China's newly partially privatized firms," Journal of Financial Economics, Elsevier, vol. 84(2), pages 330-357, May.
    5. Agrawal, Anup & Knoeber, Charles R, 2001. "Do Some Outside Directors Play a Political Role?," Journal of Law and Economics, University of Chicago Press, vol. 44(1), pages 179-198, April.
    6. Maggie Xiaoyang Chen, 2013. "The Matching Of Heterogeneous Firms And Politicians," Economic Inquiry, Western Economic Association International, vol. 51(2), pages 1502-1522, April.
    7. Qing He & Terence Tai‐Leung Chong & Li Li & Jun Zhang, 2010. "A Competing Risks Analysis of Corporate Survival," Financial Management, Financial Management Association International, vol. 39(4), pages 1697-1718, December.
    8. Chengyao Lei, 2014. "The Reform of State-owned Commercial Banks in China: A Political Economy Perspective," Economic and Political Studies, Taylor & Francis Journals, vol. 2(2), pages 67-88, July.
    9. Hyeog Ug Kwon & Futoshi Narita & Machiko Narita, 2015. "Resource Reallocation and Zombie Lending in Japan in the 1990s," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 709-732, October.
    10. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
    11. repec:cup:jfinqa:v:46:y:2011:i:06:p:1795-1830_00 is not listed on IDEAS
    12. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, vol. 96(1), pages 369-386, March.
    13. Johnson, Simon & Mitton, Todd, 2003. "Cronyism and capital controls: evidence from Malaysia," Journal of Financial Economics, Elsevier, vol. 67(2), pages 351-382, February.
    14. Andrei Shleifer & Robert W. Vishny, 1994. "Politicians and Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 995-1025.
    15. Ricardo J. Caballero & Takeo Hoshi & Anil K. Kashyap, 2008. "Zombie Lending and Depressed Restructuring in Japan," American Economic Review, American Economic Association, vol. 98(5), pages 1943-1977, December.
    16. Asim Ijaz Khwaja & Atif Mian, 2005. "Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(4), pages 1371-1411.
    17. Firth, Michael & Lin, Chen & Liu, Ping & Wong, Sonia M.L., 2009. "Inside the black box: Bank credit allocation in China's private sector," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1144-1155, June.
    18. Fan, Joseph P.H. & Rui, Oliver Meng & Zhao, Mengxin, 2008. "Public governance and corporate finance: Evidence from corruption cases," Journal of Comparative Economics, Elsevier, vol. 36(3), pages 343-364, September.
    19. Bailey, Warren & Huang, Wei & Yang, Zhishu, 2011. "Bank Loans with Chinese Characteristics: Some Evidence on Inside Debt in a State-Controlled Banking System," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(6), pages 1795-1830, December.
    20. Rajan, Raghuram G. & Zingales, Luigi, 2003. "The great reversals: the politics of financial development in the twentieth century," Journal of Financial Economics, Elsevier, vol. 69(1), pages 5-50, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Brahma, Sanjukta & Zhang, Jing & Boateng, Agyenim & Nwafor, Chioma, 2023. "Political connection and M&A performance: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 372-389.
    2. Lin, Yan & Liu, Yijia & Chan, Kam C., 2021. "Political connections and product market competition: Effects and channels," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 801-816.
    3. He, Qing & Li, Xiaoyang, 2021. "The failure of Chinese peer-to-peer lending platforms: Finance and politics," Journal of Corporate Finance, Elsevier, vol. 66(C).
    4. Ungerer, Christina & Reuther, Kevin & Baltes, Guido, 2021. "The lingering living dead phenomenon: Distorting venture survival studies?," Journal of Business Venturing Insights, Elsevier, vol. 16(C).
    5. Zhang, Xiaoqian & Huang, Bin, 2022. "Does bank competition inhibit the formation of zombie firms?," International Review of Economics & Finance, Elsevier, vol. 80(C), pages 1045-1060.
    6. Yi, Shangkun & Wang, Jian & Wang, Xiaoting & Feng, Hongrui, 2022. "CEO political connection and stock sentiment beta: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bao, Xiaolu & Johan, Sofia & Kutsuna, Kenji, 2016. "Do political connections matter in accessing capital markets? Evidence from China," Emerging Markets Review, Elsevier, vol. 29(C), pages 24-41.
    2. Feng Liu & Hui Lin & Huiying Wu, 2018. "Political Connections and Firm Value in China: An Event Study," Journal of Business Ethics, Springer, vol. 152(2), pages 551-571, October.
    3. Dang, Tri Vi & He, Qing, 2016. "Bureaucrats as successor CEOs," BOFIT Discussion Papers 13/2016, Bank of Finland, Institute for Economies in Transition.
    4. Ren, Haohan & Zhao, Xiaofeng, 2020. "Anticorruption, political connections, and corporate cash policy: Evidence from politician downfalls in China," Emerging Markets Review, Elsevier, vol. 45(C).
    5. Daeheon Choi & Chune Young Chung & Soon-Ihl Samuel Hong & Jason Young, 2020. "The Role of Political Collusion in Corporate Performance in the Korean Market," Sustainability, MDPI, vol. 12(5), pages 1-18, March.
    6. Banerji, Sanjay & Duygun, Meryem & Shaban, Mohamed, 2018. "Political connections, bailout in financial markets and firm value," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 388-401.
    7. repec:zbw:bofitp:2016_013 is not listed on IDEAS
    8. Jia, Ning & Mao, Xinshu & Yuan, Rongli, 2019. "Political connections and directors' and officers' liability insurance – Evidence from China," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 353-372.
    9. Tang, Xuesong & Lin, Yan & Peng, Qing & Du, Jun & Chan, Kam C., 2016. "Politically connected directors and firm value: Evidence from forced resignations in China," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 148-167.
    10. Liu, Li & Liu, Qigui & Tian, Gary & Wang, Peipei, 2018. "Government connections and the persistence of profitability: Evidence from Chinese listed firms," Emerging Markets Review, Elsevier, vol. 36(C), pages 110-129.
    11. Wang, Fangjun & Xu, Luying & Zhang, Junrui & Shu, Wei, 2018. "Political connections, internal control and firm value: Evidence from China's anti-corruption campaign," Journal of Business Research, Elsevier, vol. 86(C), pages 53-67.
    12. Feng, Xunan & Johansson, Anders C. & Zhang, Tianyu, 2015. "Mixing business with politics: Political participation by entrepreneurs in China," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 220-235.
    13. Thanh Ngo & Jurica Susnjara, 2020. "Government contracts and US bond yield spreads: A study on costs and benefits of materialized political connections," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(7-8), pages 1059-1085, July.
    14. Liu, Qigui & Tang, Jinghua & Tian, Gary Gang, 2013. "Does political capital create value in the IPO market? Evidence from China," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 395-413.
    15. Liu, Qigui & Luo, Tianpei & Tian, Gary, 2016. "Political connections with corrupt government bureaucrats and corporate M&A decisions: A natural experiment from the anti-corruption cases in China," Pacific-Basin Finance Journal, Elsevier, vol. 37(C), pages 52-80.
    16. Wang, Xiaoming & Xu, Tingting, 2022. "Pay of political directors in China," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    17. Dang, Tri Vi & He, Qing, 2016. "Bureaucrats as successor CEOs," BOFIT Discussion Papers 13/2016, Bank of Finland Institute for Emerging Economies (BOFIT).
    18. He, Qing & Li, Xiaoyang, 2020. "The failure of Chinese peer-to-peer lending platforms : Finance and politics," BOFIT Discussion Papers 27/2020, Bank of Finland, Institute for Economies in Transition.
    19. He, Qing & Li, Xiaoyang, 2020. "The failure of Chinese peer-to-peer lending platforms: Finance and politics," BOFIT Discussion Papers 27/2020, Bank of Finland Institute for Emerging Economies (BOFIT).
    20. Dang, Vinh Q.T. & Otchere, Isaac & So, Erin P.K., 2022. "Does the nature of political connection matter for corporate social responsibility engagement? Evidence from China," Emerging Markets Review, Elsevier, vol. 52(C).
    21. Yeh, Yin-Hua & Shu, Pei-Gi & Chiu, Shean-Bii, 2013. "Political connections, corporate governance and preferential bank loans," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1079-1101.

    More about this item

    Keywords

    Zombie firm; Political connection; Resource misallocation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out
    • P34 - Political Economy and Comparative Economic Systems - - Socialist Institutions and Their Transitions - - - Finance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:69:y:2020:i:c:p:1056-1070. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620165 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.