Political connections and corporate overinvestment: evidence from Chinese A-Share listed companies

Abstract

This thesis examines the overinvestment issue of politically connected firms in China. Using a sample of Chinese A-share listed companies during the period from 2008 to 2013, the thesis shows that in general, firms with political connections at the top managerial level (CEO or CFO) overinvest compared to firms with no such connection. Specifically, by constructing a detailed set of political connection variables, I find that this phenomenon is primarily exhibited in the private firms with connections (at top managerial level) in central-type government with high-level political status. It is also exhibited in state-owned firms’ connections (at top managerial level) in local-type government with low-level political status. However, firms with political connections on the board of directors and among management team members (managers other than CEO and CFO), do not show an overinvestment issue on average. The thesis also finds that the overinvestment behavior of the politically connected firms (at top managerial level) leads to a deterioration in firm performance in subsequent years. This coincides with the proposition that Chinese companies, especially private companies, seek political connections as a complement to underdeveloped formal institutions and market contracting. The cost of obtaining and maintaining these political ties is potentially channeled through corporate overinvestment. This thesis provides a rich foundation for understanding the nature of political connections, as well as the underlying incentives of each party in the political network in China.