Adding Party Building Provisions in Corporate Articles and Enterprise Cost Stickiness: Based on the Interpretation of Party Organization Governance

Abstract

Adding Party building provisions in corporate articles is conducive to safeguarding the statutory status of Party organizations in the corporate governance structure. And it can help to improve enterprises’ ability of political governance. After implementing this practice, the internal management and decision-making of enterprises might be deeply influenced by Party organizations, and thus the cost control level might be changed. This paper focuses on the impact of this practice on cost stickiness and analyzes its functional mechanism. Cost stickiness refers to the asymmetric cost change in response to sales change, and it reflects the tendency of enterprises to hold on to resources in the downturns. Based on a research sample of A-share listed companies from 2013 to 2018, we apply the difference-in-differences approach to examine the effect of adding Party building provisions in corporate articles on cost stickiness. We manually collect data on listed companies that have implemented this practice. The results show that the stickiness level of enterprise total operating cost is significantly reduced after implementing the practice, and this change is achieved by mitigating the dual agency problems. As the statutory status of Party organizations is established, Party organizations in enterprises have more motivation and ability to participate in the operation and management of enterprises. Thus, managers are subject to greater scrutiny by Party organizations. In this case, managers will constrain their opportunistic behaviors, leading to lower cost stickiness. In addition, Party organizations help to protect the interest of minority shareholders. The increasing difficulty of resource extraction of majority shareholders leads to a reduction in expropriation behaviors such as asset occupation, which in turn lessens enterprise cost stickiness. The participation of Party organizations in corporate governance also means that they guide shareholders and management to make decisions in line with the spirit of the Party by means of cultural publicity and spirit guidance, so as to reduce self-interested behaviors that are contrary to the spirit of the Party, thus alleviating the dual agency problem of enterprises. The findings indicate that Party organization governance contributes to optimizing the resource allocation decision of managers and improving the efficiency of cost management. Further research finds that the relationship between the practice and cost stickiness is moderated by the ownership structure of enterprises, and it is more significant in the case of more dispersed ownership structure, lower ownership constraints, and lower management shareholding. Mediation mechanism tests show that adding Party building provisions in corporate articles can indeed reduce cost stickiness by alleviating the dual agency problems. The innovation of this paper is mainly reflected in two aspects: First, this paper contributes to the literature on the determinants of cost stickiness by documenting a new way of corporate governance. Through combining Party building and cost stickiness, the study examines the impact of political governance on cost stickiness. The findings expand the channel of enterprise cost management. Second, different from the existing research methods, this paper uses the difference-in-differences approach to examine the dynamic changes of cost stickiness before and after the Party building reform. It provides relatively rigorous scientific evidence for the implementation of adding Party building provisions in corporate articles, and provides guidance for Chinese listed companies to properly and effectively embed the Party organization into the corporate governance structure.