Land Cronyism and Corporate Political Cycles in China

Abstract

Since 2004, China’s industrial land price has remained constant while other land prices in China have increased to about six times their 2004 levels. This paper measures the degree of industrial land subsidy to a firm using the ratio of the market value of land in the neighborhood to the price at which the firm purchased the land from the local government. Matching publicly listed firm data with over one million land transactions from 1998 through 2013 in China, we find that heavily subsidized firms exhibit starker political business cycles, that is, we find higher investment rates in the years that immediately precede expected changes in local leadership. However, these firms’ investment efficiency rates decline in those years. We interpret these findings as evidence of cronyism, i.e., listed firms return the favor of land subsidies from local leaders since increased investment before turnovers can boost local GDP and enhance a leader’s likelihood of promotion. Further investigation shows that the cronyism effect is stronger for cities with high-career-incentive leaders.