Political governance and corporate investment efficiency in China

Abstract

ABSTRACT The involvement of the Communist Party of China (CPC) in corporate decision-making has formed a governance model with ‘Chinese characteristics’ that diverges from commonly studied governance models. This paper provides direct insight into China’s political governance model by examining how the Party organization influences the investment efficiency of private firms. We find that increasing the proportion of Party directors (i.e. stronger political governance) improves the investment efficiency of private firms. This finding survives various robustness checks. The mediation analysis suggests that Party organizations promote corporate investment efficiency by playing advisory and supervisory roles in corporate governance. One policy implication is that, from the perspective of improving investment efficiency, the CPC should encourage private firms to invite more Party organization members to the board of directors, supervisory board, or management.