Party Building or Noisy Signaling? The Contours of Political Conformity in Chinese Corporate Governance

Abstract

We examine responses by Chinese firms to a “party-building” policy launched by the Chinese Communist Party (CCP) in 2015 to reform China’s state-owned enterprises (SOEs). The policy requires SOEs to follow a model template of charter amendments to formalize and elevate the role of the CCP in their corporate governance. In the period 2015-18, about ten percent of publicly traded SOEs failed to follow the mandatory policy, while nearly six percent of privately owned enterprises (POEs) complied even though they were not subject to the policy. We find wide variation in the provisions adopted within and across firm ownership types, with SOE adoptions apparently affected by their ownership structures and exposure to capital market forces, and POE adoptions associated with political connections. Our findings highlight the complex contours of political conformity in Chinese firms and raise questions about the trajectory of Chinese corporate governance reform and foreign investment activity.