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Political uncertainty and allocation of decision rights among business groups: Evidence from the replacement of municipal officials

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  • Li, Mangmang
  • Cao, Yuqiang
  • Lu, Meiting
  • Wang, Hongjian

Abstract

A firm trades off information transfer costs and agency costs to determine the distribution of decision rights to lower-level management. Using the replacement of municipal officials as an exogenous shock of political uncertainty, we find a business group is more likely to delegate decision rights of cash resources to subsidiaries when political uncertainty is high. The association is only evident among non-state-owned-enterprises (non-SOEs) and not SOEs. Additional tests show that the delegation of decision rights is more pronounced among firms with weak internal control and those located in cities where local governments have replaced their party secretary. We also find that firm decentralization can enhance investment efficiency and the marginal value of cash in the presence of high political uncertainty. Overall, our findings support the decentralization theory, and provide causal evidence on how political uncertainty influences allocation of decision rights among listed firms in an emerging economy with large state ownership.

Suggested Citation

  • Li, Mangmang & Cao, Yuqiang & Lu, Meiting & Wang, Hongjian, 2021. "Political uncertainty and allocation of decision rights among business groups: Evidence from the replacement of municipal officials," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    • Handle: RePEc:eee:pacfin:v:67:y:2021:i:c:s0927538x21000482
    DOI: 10.1016/j.pacfin.2021.101541
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    More about this item

    Keywords

    Political uncertainty; Information transfer costs; Decision rights; Decentralization theory;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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