Government resource allocation through related party transactions: Evidence from China

Abstract

Using unique hand-collected data of related party transactions (RPTs) between state-owned enterprises (SOEs) and government noncorporate agencies in China, we investigate the behavior of government resource allocation and its impacts. We find that Chinese governments are more likely to allocate resources to SOEs with a politically connected chairperson of the board through RPTs. The results remain robust after considering endogeneity concerns. In SOEs with a politically connected chairperson, resources obtained through RPTs are not associated with improved economic outputs except for increased investment expenditures. In addition, resources obtained are associated with improved labor cost stickiness. Our results add new evidence of the political exchange between Chinese governments and SOEs facilitated by politically connected executives. JEL Classification: G30, G38