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The Value of Political Ties versus Market Credibility: Evidence from Corporate Scandals in China

Author

Listed:
  • T.J. Wong

    (Department of Accounting, The Chinese University of Hong Kong)

  • Mingyi Hung

    () (Department of Accounting, Hong Kong University of Science and Technology
    Institute for Emerging Market Studies, Hong Kong University of Science and Technology)

  • Fang Zhang

    (Department of Accounting, Hong Kong Baptist University)

Abstract

This paper compares the value of political ties and market credibility in China by examining the consequence of corporate scandals. We categorize Chinese corporate scandals by whether the scandal is primarily associated with the destruction of i) the firm’s political networks (political scandals), ii) the firm’s market credibility (market scandals), or iii) both (mixed scandals). Consistent with our hypothesis that scandals signaling the destruction of political ties are associated with greater losses in firm value than scandals signaling the destruction of market credibility, we find that the stock market reacts more negatively to political and mixed scandals than to market scandals. In addition, the greater negative market reactions associated with political and mixed scandals are primarily driven by firms that rely more on political networks. We also find that, compared to market scandals, political and mixed scandals lead to larger decreases in operating performance, greater reduction in loans from state-owned banks, and higher departure of political directors.

Suggested Citation

  • T.J. Wong & Mingyi Hung & Fang Zhang, 2015. "The Value of Political Ties versus Market Credibility: Evidence from Corporate Scandals in China," HKUST IEMS Working Paper Series 2015-18, HKUST Institute for Emerging Market Studies, revised Mar 2015.
  • Handle: RePEc:hku:wpaper:201518
    as

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    File URL: http://iems.ust.hk/assets/publications/working-papers-2015/iemswp2015-18.pdf
    File Function: First version, 2015
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    References listed on IDEAS

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    More about this item

    Keywords

    political economy; market credibility; corporate scandals; China;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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