Political favouritism and investment efficiency

Abstract

Using hand-collected data on the birthplaces and working experiences of the highest-ranking politicians in China's provinces, we identify cities favoured by the politicians and examine the impact of political regional favouritism on the investment efficiency of firms located in the favoured cities. We find that such favouritism is associated with significantly less efficient corporate investment, and the deviation from the optimal investment mainly stems from severe overinvestment. We explore how the impact of regional favouritism on corporate investment efficiency varies with the region's progress in marketization, and find that a higher degree of marketization reduces the strength of the relation between political favouritism and investment efficiency. We further identify a possible channel through which favouritism leads to overinvestment, and find that favoured firms have better access to debt financing and receive more government subsidies.