The Value of Implicit Political Connections

• In Event: Journal of International Accounting Research Plenary Presentations

Abstract

Taking advantage of a unique dataset containing rich information on the social ties of top management teams (TMT) for Chinese listed firms, we introduce a new measure capturing the strength of implicit political connections (IPC), measuring political resources from TMT social ties. More specifically, IPC measures how many politically connected colleagues that TMT has. We uncover a positive relationship between firms’ implicit political connection and firm value, consistent with the hypothesis that political connections can be leveraged to enhance firm value. Further, firms with more implicit political resources or direct political connection (political connection owned by TMT) make higher payment to their top management teams, especially in the case of non-state-owned enterprises. Our findings are robust after controlling for the potential endogeneity by using (i) conventional IV methods based on the distance from firms’ headquarters to China’s capital (Beijing) and the provincial government building (ii) a ‘synthetic’ instrument. Overall, our results suggest that implicit political connection is more important than direct political connection regarding firm value addition.

Authors

• Suzanne Mullinnix, AAMVA

• C.S. Agnes Cheng, The Hong Kong Polytechnic University

• David C. Broadstock, The Hong Kong Polytechnic University

• Xiaoqi Chen, The Hong Kong Polytechnic University

• Wenli Huang, The Hong Kong Polytechnic University