The effect of political connections on the distribution of firm performance

• Published in: China economic review Vol. 88; p. 102289
• Main Authors: Li, Xuan, Wang, Yanchen
• Format: Journal Article
• Language: English
• Published: Elsevier Inc 01.12.2024
• Subjects: Distributional consequences; Firm performance; Political connections; Firm performance; D73; H25; Political connections; Distributional consequences; P26
• ISSN: 1043-951X
• DOI: 10.1016/j.chieco.2024.102289

Political connections have the potential to redistribute rents toward connected firms, and away from non-connected ones. In this paper, we show that this is indeed the case for Chinese listed firms during 2008–2015. Connected firms (as proxied by college ties between senior management and local leaders) have higher Return on Assets (ROA) and more government subsidies, while non-connected firms experience a significant decline in both ROA and subsidy when executive turnover or political rotation leads to the creation of connected firms in the city. The differential effects on non-connected firms within the same industry versus those in different industries suggest that non-connected firms outside the industry are more adversely affected due to leaders' attempts to mask favoritism with broad industrial policy. •We exam distributional consequences of political connections in the Chinese context.•Connection is proxied by college ties between senior management and local leaders.•Subsidy reallocation may lead to better performance for connected firms.•Leaders' attempts to mask favoritism with industrial policy benefit whole industry.•Non-connected firms outside the industry are more adversely affected.