Are Political Connections a Blessing or a Curse? Evidence from CEO Turnover in China

Jiaxing You · Michelle Du

189 citations0/0 files storedCorporate Governance An International Review

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Political Influence and Corporate Strategies Corporate Finance and Governance Corruption and Economic Development

Abstract

ABSTRACT Manuscript Type: Empirical Research Question/Issue: This paper investigates the issue of forced CEO turnover in China and summarizes the economic consequences of political connections within the framework of corporate governance. Research Findings/Insights: Using a large sample of listed firms in China from 2005 to 2008, we find that politically connected CEOs are less likely to be fired and that the sensitivity of forced turnover to firm performance is weaker for connected CEOs than for their non‐connected peers. This suggests that CEOs in a transition economy tend to use their political resources for their own good. We also find a significantly positive relationship between the political connections of retained CEOs and future firm performance only when firm profitability is below the industry median. These findings suggest that the value of political connections is contingent on a firm's operating performance, and that the benefits of political connections may outweigh their costs when firms do not meet their profitability targets. Theoretical/Academic Implications: This study is the first to examine how the political ties of CEOs relate to their forced turnover. It integrates agency theory with resource dependence theory and contributes to the ongoing debate on the role of political connections in emerging markets. It also takes a step toward reconciling the mixed evidence for the effects of political connections on firm performance by demonstrating a sharp difference between firms under different operating statuses. Practitioner/Policy Implications: This study offers insights to policy makers who are interested in improving corporate governance in transitional economies such as China, where CEOs have close connections with the government. It also provides a deep perspective for the boards in politically connected firms, allowing them to deal with the relationship between top management and the government in a healthy way.

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References

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