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Political Turnover, Ownership, and Corporate Investment

Author

Listed:
  • Cao, Jerry

    () (Singapore Management University)

  • Julio, Brandon

    () (University of Oregon)

  • Leng, Tiecheng

    () (Singapore Management University)

  • Zhou, Sili

    () (Singapore Management University)

Abstract

We examine the impact of political influence and ownership on corporate investment by exploiting the unique way provincial leaders are selected and promoted in China. The tournament-style promotion system creates incentives for new provincial governors to exert their influence over capital allocation, particularly during the early years of their term. Using a neighboring-province difference-in-differences estimation approach, we find that there is a divergence in investment rates between state owned enterprises (SOEs) and non-state owned enterprises (non-SOEs) following political turnover. SOEs experience an abnormal increase in investment by 6.0% in the year following the turnover, consistent with the incentives of a new governor to stimulate investment. In contrast, investment rates for non-SOEs decline significantly post-turnover, suggesting that the political influence exerted over SOEs crowds out private investment. The effects of political turnover on investment are mainly driven by normal turnovers, and turnovers with less-educated or local-born successors. Finally, we provide evidence that the political incentives around the turnover of provincial governors represent a misallocation of capital as measures of investment efficiency decline post-turnover.

Suggested Citation

  • Cao, Jerry & Julio, Brandon & Leng, Tiecheng & Zhou, Sili, 2016. "Political Turnover, Ownership, and Corporate Investment," RIEI Working Papers 2016-06, Xi'an Jiaotong-Liverpool University, Research Institute for Economic Integration.
  • Handle: RePEc:xjt:rieiwp:2016-06
    as

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    File URL: http://58.210.89.21/RePEc/xjt/working-papers/RIEI-WP_2016-06.pdf
    File Function: First version, 2016
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    References listed on IDEAS

    as
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    1. repec:eee:corfin:v:49:y:2018:i:c:p:186-203 is not listed on IDEAS

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    Keywords

    Corporate investment; Political turnover; China; SOE; Political uncertainty; Grabbing-hand; Crowding out; Investment efficiency;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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