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Firms and Local Governments: Relationship Building during Political Turnovers

Author

Listed:
  • Hanming Fang
  • Zhe Li
  • Nianhang Xu
  • Hongjun Yan

Abstract

We study how firms build relations with local governments in emerging markets without established rules of political lobbying. We document that following a turnover of the Party Secretary or mayor of a city in China, firms (especially privately owned enterprises, POEs hereafter) headquartered in that city significantly increase their “perk spending,” for example, expenses for travel and entertainment among others. Both the instrumental-variable-based results and heterogeneity analysis are consistent with the interpretation that the perk spending is used to build relations with local governments. In addition, we find that local political turnover in a city tends to be followed by changes of the Chairmen or the CEOs of state-owned enterprises that are controlled by the local government. We also discuss and rule out several alternative explanations for the above findings.

Suggested Citation

  • Hanming Fang & Zhe Li & Nianhang Xu & Hongjun Yan, 2023. "Firms and Local Governments: Relationship Building during Political Turnovers," Review of Finance, European Finance Association, vol. 27(2), pages 739-762.
    • Handle: RePEc:oup:revfin:v:27:y:2023:i:2:p:739-762.
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    File URL: http://hdl.handle.net/10.1093/rof/rfac038
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    More about this item

    Keywords

    Government; Relationship; Political turnovers; Perk; Personnel changes;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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