Abstract
How political capital affects physical capital investment is controversial in the literature. This paper explains the contradictory relationship between political and physical capitals. Using an exogenous shock (leading to a sudden reduction in political capital) and the DID estimation, we find that physical capital complements political capital for state-owned enterprises (SOEs) while this relationship is substitutional for private firms. This result can be explained by the changes in firms' economic performance after the reduction in political capital. Our findings provide an important policy implication. That is, governments should lessen policy burdens on SOEs and reduce institutional discrimination against private firms.
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