Firms’ Political Connection Adaptations in the Aftermath of Political Faulting

Abstract

In this study, we develop a novel framework to highlight the two central concerns for firms to manage political connections. We theorize that firms will craft their political connections to strategically balance the value of political connections in seeking government resources and the downside risks for those connections to get firms entangled in political conflicts and struggles. In light of these two concerns, we further highlight that firms can adopt two strategies to adapt to political changes: adding new political connections to promote resource seeking in the post-change political system, and removing existing political connections to avoid being implicated by political conflicts. Drawing on this nuanced theoretical framework, we explore how political faulting—defined as the political shocks caused by the sudden downfall and replacements of major political leaders—drive firms to add new political connections and remove existing ones in distinct and asymmetric fashions. We conceptualize an inverted U-shaped relationship between political faulting intensity and the addition of new political connections, while predicting a monotonically positive relationship between political faulting intensity on firms’ removal of existing political connections. We further argue that such effects of political faulting will be moderated by firms’ government dependence. Evidence from Chinese listed firms’ political connection adaptations in response to the indictment and replacements of high-level corrupt officials in their headquarter provinces between 2012 and 2019 lends strong support to our theory.