Do checks on bureaucrats improve firm value? Evidence from a natural experiment

Abstract

This paper studies the impact on firm value of tighter checks on bureaucrats’ behaviour. We use as a natural experiment the revision in 2015 by the Communist Party of China (CPC) of its regulations on disciplinary actions. We document a positive and substantial market reaction following this unexpected policy change that tightened and formalised constraints on bureaucrats’ misconduct. The impact is less pronounced for firms with state ownership, firms having CEOs or directors with CPC membership, and firms that operate in provinces with better institutional quality. The subsequent revision in 2018 that enforced political obedience is not associated with a positive market reaction.

Institutional gap and enterprise behavior: Evidence from China

“…An et al [10] confirm the relationship between alternative institutions and finance development in China, such as incentives, reputation and relationships. Constraints on bureaucrats' misconduct induce positive market reactions, especially to private firms [15]. To be impressed, the research combines social development contexts such as epidemic and colonial history with financial development [11,14].…”

“…However, the empirical results of the relationship between the alternative institutions and private enterprises' performance are not consistent. An et al [15] propose that enforced political obedience is not associated with market performance. Fan et al [16] proved CEOs holding political connections are related to their firm's stock return underperformances.…”

Foreign shareholder, overseas sale and corporate profit margin

“…Consequently, foreign shareholders may exert diverse influences on the inverse association between overseas sales and profit margin. According to the research of An et al [ 59 ], we categorize enterprises as low or high marketization degree based on whether their location’s level of marketization ( Market index ) surpasses or equals the annual average degree of marketization respectively. Similarly, we categorize enterprises based on the non-state-owned economic development level ( NS index ) of the region where they are located, distinguishing between those situated in regions with low levels and high levels of non-state-owned economic development, as determined by whether the NS index exceeds or equals the annual average level.…”

The influence of cultural friction on foreign divestment of multinational enterprises——the moderating role of formal institutional distance and political connections

“…With the increasing intensity of China's anti-corruption efforts and the rapid development of the market economy, establishing and maintaining political connections have become increasingly challenging, resulting in gradually escalating costs [56]. Taking Chinese companies as an example, scholars point out that companies with political connections are more susceptible to the impact of political scandals and corruption factors compared to ordinary companies, thus exerting a negative influence on their stock prices [57]. Secondly, from a performance perspective, companies with political connections are more likely to cater to the social demands of the government and politicians, which can lead to a misallocation of resources [25].…”