Windfalls of emperors' sojourns: Stock market reactions to Chinese firms hosting high‐ranking government officials

Abstract

Research summary: We contribute to the corporate political activity (CPA) literature by showing that investors value companies that host visits of high‐ranking government officials (President and Premier). We argue that investors may value host official visits for two reasons: (1) the signal received about possibility of firm accessing government‐controlled resources via promotion or protection; and (2) the certification effect from such high‐powered visitors elevating the firm's reputation and legitimacy. Results from an event study analysis of 84 high‐ranking government official visits in China from 2003 to 2011 indicate that investors responded positively to host firms as reflected by stock market performance. Furthermore, the greatest positive reactions accrued to firms experiencing weaker prior period financial performance and to firms that are privately compared to state‐controlled.Managerial summary: Do visits by high‐ranking government officials influence firm stock market performance? Studying a sample of Chinese public firms that hosted 84 visits by the Chinese President and the Premier from 2003 to 2011, we find that investors reacted positively to such visits compared with a group of non‐host firms from the same industry and with similar financial performance and size. In addition, firms with weaker prior financial performance and private firms benefit the most from hosting such visits. Our findings imply that hosting visits of high‐ranking government officials can signal future government‐controlled resource inflows and boost host firms' reputation and legitimacy. Copyright © 2016 John Wiley & Sons, Ltd.