Hunting Tigers and Harvesting Productivity: Evidence from Energy Firms in China

In this paper, we investigate the impacts of China's anti-corruption campaign on firms' operation and performance in the energy industry. Our theoretical model predicts that the campaign has resulted in those energy firms that had been strongly connected to government reducing their non-productive political activities, receiving fewer benefits from the government, and improving their efficiency. This is tested using a unique panel dataset of publicly listed energy firms in China for 2007-2017. Since the advent of the campaign, energy firms have less access to higher bank credits and preferential taxes through political connections, and the increasing political pressure has reduced firms' participation in philanthropy donations and bribery payments by 36% and 6.8%, respectively. Energy firms are also innovating more to compensate for their losses from the campaign, with a 23.8% increase in the number of invention-type patents found. Thus, the productivity of energy firms has been boosted by 3.9% on average since the campaign began. Our findings thus provide confirmative support that a firm responds strategically to the external political shocks through internal resource reallocation towards innovation in its operation and production.