Political Uncertainty and Corporate Investment: Evidence from the Chinese Private Companies

Abstract

China’s political system has continued to maintain a highly centralized regime despite embracing a decentralized development strategy after the 1979 economic reform. The central government frequently makes changes in political leadership to control regional governments. Such political turnover in the regional governments can generate substantial political uncertainty, which affects the overall management direction and environment of Chinese public enterprises. This study analyzes the impact of replacing city-level party secretaries (CPS) on corporate investment in 228 municipal cities in China. Political appointees can replace city-level party secretaries from within and outside the city or from higher levels of the government. Our empirical results show that these kinds of replacements more significantly dampened investment activities in listed private companies than in companies in which the city-level party secretaries have retained their positions. Corporate investment activities decreased more when a city-level party secretary was replaced with a person outside the city or parachuted from central government than when replaced within the city. Moreover, replacement effects were more negative for privatized state-owned enterprises (SOEs) than for the original privately owned companies.

Political uncertainty and corporate investment: Evidence from India

“…Additionally, the empirical literature concerning the impact of political uncertainty on corporate investment behavior (Akbar et al, 2021; An et al, 2016; Julio & Yook, 2012; Narayan et al, 2018; Piao & Jung, 2023) has numerous reasons as to why political uncertainty has an effect on corporate investment. For instance, a political party has a preference for promoting a particular sector of the economy, and by these means their leadership (Government) would have a direct impact on Investment in that sector (Narayan et al, 2018).…”

“…Since investment decisions are irreversible, a critical question is raised in the finance literature as to how businesses manage their investment decisions in unpredictable times. A search of the literature identified only a few studies that have examined this phenomenon (Akbar et al, 2021; An et al, 2016; Julio & Yook, 2012; Narayan et al, 2018; Piao & Jung, 2023). However, these studies have been conducted on samples from developed countries; only Akbar et al (2021) conducted a study on the emerging economy of Pakistan.…”