Abstract
AbstractWe study the value of the political connections of directors on Chinese boards. We build a new dataset that measures connections of directors to members of the Politburo via past school ties, and find that private firms with politically connected directors in the boardroom get on average about 16% higher subsidies over sales per firm (7 million yuan). Connected state-owned enterprises (SOEs) access debt at 11% cheaper cost, which translates into average savings of close to 32 million yuan per firm in lower interest payments. We find that the value of the political connections persisted after the anti-corruption campaign (ACC) of 2012. It became weaker for the cost of debt in SOEs, but stronger for subsidies to private firms. We argue that the value of connections in the private sector increased after the ACC because they became a less risky alternative to corruption. We also show that connected firms do not perform better.
Highlights
We examine the value of politically connected firm directors to the Chinese elite in terms of getting preferential access to resources
We find that private firms with politically connected directors in the board get around 16% higher subsidies over sales, which translates into 7.2 million yuan on average, while connected state-owned enterprises (SOEs) pay 11% less in interest rates, translating into 31.9 million yuan (USD 5.1 million) lower payments on average per firm
The 0.2 percentage points magnitude that we find are relative to an average of 1.9%, which implies that connected firms pay 11% lower cost of debt, or in monetary terms, 31.9 million yuan less
Summary
We examine the value of politically connected firm directors to the Chinese elite in terms of getting preferential access to resources. We rely on a historical measure of connections using school ties that predate the current relationship of board directors with politicians. In this way we rule out the possibility that our results are driven by the most able managers acquiring useful political connections as a result of their present position. Doing business through corruption has become harder for private firms after the ACC, increasing the relative importance of elite connections. Our results suggest that friends are purposely placed on mega-firms. This effect has become milder with the ACC
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