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Political Connections, Macroeconomic Stimulus, and Firm Performance: Evidence from China

thesis
posted on 01.05.2020, 00:00 by Chenli You
Gaining knowledge of the link between political connections and firm behavior is important for a general understanding of how resource allocation is affected by political connections. This dissertation will examine this link by using the difference-in-difference model and panel vector autoregression model with data about all the listed companies on China’s two stock markets (Shanghai and Shenzhen) from 2003 to 2012. The first chapter will introduce China’s political system, political connections between the government and listed companies, and the potential impact on firm performance. The second chapter explores the impact of China’s stimulus package on firm behavior through political connections. In response to the global financial crisis of 2008, China launched its “four trillion-yuan stimulus package”. Companies with close relationships to the central and local governments were likely to benefit more from this stimulus package. Chapter 2 uses a difference-in-difference analysis to compare politically connected and nonpolitically connected firms before and after 2008. The empirical results suggest that after the adoption of the stimulus package, politically connected firms had about 7.1% higher leverage, 9.3% higher receivables, and 6.6% lower sales compared to firms lacking those political connections, while the levels of investment, cash stock, and profit among all these firms were not significantly different. The last chapter uses within-firm variations to detect the impact of political connections on firm behavior. Using a panel vector autoregression model yields findings that show a positive shock in political connections has positive impacts on profit, receivables, and cash, while resulting in negative impacts on leverage, investment, and sales. These results suggest that a firm might need to strengthen its connections, and thus bring advantages to the organization, by hiring board members who used to be government officials. However, when a firm has already established its political connections with the government, it might need to seriously consider whether to forge more connections since there are both advantages and disadvantages to increasing political connections within a firm. For an economy, building up political connections likely harms resource allocation and long-term economic growth because the resources the firms spend on hiring previous government officials and the resources allocated to the politically connected firms are all considered to be misallocated.

History

Advisor

Chirinko, RobertLubotsky, Darren

Chair

Chirinko, RobertLubotsky, Darren

Department

Economics

Degree Grantor

University of Illinois at Chicago

Degree Level

Doctoral

Degree name

PhD, Doctor of Philosophy

Committee Member

McCloskey, Deirdre Ost, Ben Karras, George

Submitted date

May 2020

Thesis type

application/pdf

Language

en

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