Making political connections work better: Information asymmetry and the development of private firms in China

Abstract

AbstractResearch question/issuePrevious studies have documented the benefits for firms of building political connections, yet there is a gap in the literature on the information transmission effect of political connections. Our study examines the effect of political connections in a highly asymmetric information environment—private firms in China.Research findings/insightsUsing quarterly data on listed private firms in China from 2004 to 2017, we find that political connections ensure such firms have access to reliable political information, which mitigates the risks of policy uncertainty. Further, firms connected to the government are better able to mitigate the negative effects of policy uncertainty than those connected to the legislature, while firms tied to high‐level authorities are better able to do so than those tied to lower‐level ones. Specifically, political connections are more effective in lower‐marketized and peripheral regions, where information asymmetry is higher.Theoretical/academic implicationsOur study highlights the importance of political connections in mitigating the negative relationship between policy uncertainty and corporate investment via the information transmission channel. Specifically, officials can more efficiently mitigate policy uncertainty than delegates, and high‐level authorities are more effective than lower‐level officials.Practitioner/policy implicationsWe argue that building political connections helps private firms offset the negative effects of policy uncertainty. Our findings provide useful insights for understanding the impacts of Regulation No. 18 of October 2013, which limits the employment of current and retired officials in private firms.