The Politics of Corporate Governance in Chinese Firms

Project: Research

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For decades, economists have debated the proper role of government in the economy. The helping-hand model of government considers government intervention an effective way to cure market failures while the grabbing hand model holds a skeptical view of government intervention in economic development. Corporations operate in an institutional environment determined by the political, social and economic conditions of a country. Political interference over corporate decision-making can significantly affect corporate governance and firm performance. The helping-hand hypothesis posits that shareholders benefit from close ties with the government by receiving tax subsidies, borrowing from state-owned banks at a preferential term and/or being bailed out by the government during financial difficulty. In contrast, the grabbing-hand hypothesis argues that strong government ties hurt shareholders because government officials and politicians influence firms to allocate resources not to benefit shareholders, but to reward their political supporters. This project plans to examine which model best explains Chinese firms, which operate under state capitalism, where the state influences the resource allocation of economic activities and the decision-making of major corporations.To test the models, we intend to make use of the recent Dangjian (party building) reform—a major measure undertaken by the Chinese Communist Party since 2016 to solidify its leadership position in state-owned enterprises (SOEs). By utilizing this exogenous event, we have the chance that rarely available in the past to examine the causal inference of political control over corporate governance and firm performance. In addition to SOEs, our project also examines the impact of party building reform to privately owned enterprises (POEs) who voluntarily incorporated party organizations into their internal governance system. Furthermore, the subject of research covers not only Chinese A-share listed companies but also Chinese companies that listed on overseas stock exchanges, such as those in the U.S., Hong Kong and Singapore. The research result will further the understanding of the extent to which and the channels through which the state intervenes in the business decision of Chinese firms and how political intervention impacts firm performance. Finally, we seek to provide policy suggestions to regulators and stock exchanges as to the governance and investor protection of Chinese firms. 


Project number9042915
Grant typeGRF
Effective start/end date1/09/19 → …