The Value of Political Connections: Chinese Evidence

Abstract

We investigate the value of political connections to Chinese companies using a sample of companies registered in Shanghai during the Shanghai Social Security Fund scandal. Shanghai Social Security Fund scandal was a major Chinese scandal in 2006, which brought down Chen Liangyu - the top official in Shanghai. Around 72% of the 137 sample firms are either controlled by the Shanghai government or having board member(s) with career experience in Shanghai government. These firms suffered on average -2.21% cumulative abnormal returns during the five days surrounding the disclosure of Chen Liangyu's dismissal. Around 54% of the 137 companies are controlled by the Shanghai government. These firms suffered on average -2.23% cumulative abnormal returns during the five days surrounding the disclosure of Chen Liangyu's dismissal. Around 64% of these 137 companies have at least a board member with career experience of Shanghai government. These firms suffered on average -2.38% cumulative abnormal returns during the five days surrounding the disclosure of the dismissal of Chen Liangyu. We further classify firms controlled by Shanghai government as firms with explicit political connections and firms having board member(s) with career experience of Shanghai government as firms with implicit political connections. The regression results show that firms with implicit political connections have experienced more severe market reactions around the disclosure of Chen Liangyu's dismissal.