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Vertical Integration, Institutional Determinants and Impact: Evidence from China

Author

Listed:
  • Joseph P.H. Fan
  • Jun Huang
  • Randall Morck
  • Bernard Yeung

Abstract

Where legal systems and market forces enforce contracts inadequately, vertical integration can circumvent these transaction difficulties. But, such environments often also feature highly interventionist government, and even corruption. Vertical integration might then enhance returns to political rent-seeking aimed at securing and extending market power. Thus, where political rent seeking is minimal, vertical integration should add to firm value and economy performance; but where political rent seeking is substantial, firm value might rise as economy performance decays. China offers a suitable background for empirical examination of these issues because her legal and market institutions are generally weak, but nonetheless exhibit substantial province-level variation. Vertical integration is more common where legal institutions are weaker and where regional governments are of lower quality or more interventionist. In such provinces, firms led by insiders with political connections are more likely to be vertically integrated. Vertical integration is negatively associated with firm value if the top corporate insider is politically connected, but weakly positively associated with public share valuations if the politically connected firm is independently audited. Finally, provinces whose vertical integrated firms tend to have politically unconnected CEOs exhibit elevated per capita GDP growth, while provinces whose vertically integrated firms tend to have political insiders as CEOs exhibit depressed per capita GDP growth.

Suggested Citation

  • Joseph P.H. Fan & Jun Huang & Randall Morck & Bernard Yeung, 2009. "Vertical Integration, Institutional Determinants and Impact: Evidence from China," NBER Working Papers 14650, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:14650 Note: CF
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    References listed on IDEAS

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    Cited by:

    1. Giulio Cainelli & Donato Iacobucci, 2012. "Agglomeration, Related Variety, and Vertical Integration," Economic Geography, Clark University, vol. 88(3), pages 255-277, July.
    2. repec:pal:jintbs:v:48:y:2017:i:6:d:10.1057_s41267-017-0083-y is not listed on IDEAS

    More about this item

    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • L22 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Organization and Market Structure
    • P14 - Economic Systems - - Capitalist Systems - - - Property Rights
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism

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