How Do Firms Respond to Board Political Capital Loss?

Abstract

Politically connected firms may rely primarily on political capital to compete, but a sudden, irrevocable loss of such capital poses a critical challenge for focal firms and prompts them to explore new strategies to compensate for this loss. Drawing upon resource dependence logic and nonmarket strategy literature, we examine how firms tackle this challenge by focusing on two types of strategic reactions: activities to nurture market-based capabilities – R&D investment, and activities to develop alternative channels with socio-political actors – bribery. We predict focal firms to substantially increase their R&D and bribery expenditures after a negative shock. This prediction in confirmed in a sample of Chinese public corporations in the 2010s, during which the focal companies experienced an exogenous shock from the central government requiring independent directors with recent government background to resign from their current board positions. These increases are found more salient in firms whose board chairs and CEOs lack political capital. Moreover, organizational slack and institutional environment lead to different patterns of strategic adjustments: While firms with more organizational slack and located in a better institutional environment prefer more R&D investment post shock, those with less slack and in a weaker environment opt for more bribery activities. Our study contributes to governance and strategy literatures by demonstrating how firms may react to unexpected weakening/loss of social and political capital at the board level and beyond.