Topic: Political Turnover, Ownership, and Corporate Investment

Speaker: Sili Zhou, Ph.D. Candidate, Singapore Management University

Host: Prof. HUANG Ying

Time: 10:30-12:00 October 10th, 2016 (Monday)

Venue: Room 702

Abstract:  We examine the impact of political influence and ownership on corporate investment by exploiting the unique way provincial leaders are promoted in China. The tournament-style promotion system creates incentives for new governors to exert influence over investment in the early years of their term. We find a divergence in investment rates between state owned enterprises (SOEs) and private firms following political turnover. SOEs experience an increase in investment by 6.0% following the turnover while investment rates for private firms decline, suggesting that the political influence exerted over SOEs crowds out private investment. The effects of political turnover on SOE investment are mainly driven by normal turnovers, turnovers with less-educated or local-born successors, and turnovers where successors are 55years old or older at the time of appointment. We also document that firm leverage exhibits a similar pattern to investment and employment around the turnover cycle, indicating that the crowding out effect may come through a credit channel. Finally, we show that the political incentives around the turnovers of provincial governors represent a misallocation of capital as measures of investment efficiency decline post-turnover.