That sound you hear is the sigh of contentment upon seeing all my prejudices confirmed. Hey, I’m only human.
But seriously: here’s a paper (Lin et al., “Political Influence and Corporate Governance: Evidence from Party-Building Reform in China”) on investor reactions to Party-building (党建 dangjian) reforms in the corporate sector. Bottom line: investors are generally negative, but with some interesting exceptions.
(1) This is a paper about what investors think such reforms would do to firm value. That is not the same as what such reforms will actually do to firm value, if you’re measuring firm value by something other than market capitalization (which reflects what investors think). But there is often wisdom in crowds, especially when the crowds have their own money at stake.
(2) Political influence should in theory have a positive effect as well as a negative effect on firm value. Political influence often goes hand in hand with political connections, and politically connected firms can get goodies from the state such as subsidies and protection from bankruptcy. How the pluses ultimately balance out against the minuses is not, at least to me, self-evident.
As always in posts about this subject, I recommend this great paper by Curtis Milhaupt and Wentong Zheng on how SOEs aren’t as state-y as you think and private enterprises aren’t as private as you think. This paper also makes similar points, and has a good discussion of the pluses and minuses of political influence. Its message is that this particular political intervention increases the minuses.
1 thought on “Dog bites man: Party influence over business harms firm value”
it’s really tricky to evaluate or measure if either state-owned or private undertakings in China are independent from the party state from legal aspect. for instance, in defending that China’s SOEs are legal and economically independent, China lawyers always refer to the Law on State-Owned Assets of Enterprises and Interim Regulations on Supervision and Management of State-Owned Assets of Enterprises to explain to the outside world that SOEs are legally independent entities. However, in China, the party controls over either the SOEs or private enterprises is beyond the law and thus there is no legal evidence to prove or rebut the situation. several years ago, a guy raised a problem to me: who controls SOE, chairman of BOD or general party secretary of the company? i said, surely the chairman of BOD. Then I referred to the Company Law of China. He smiled: you only know the company, too naieve. Then he further enlightened me: imagine, how many meetings of BOD are held within a year? How many times can the Chairman of BOD excercise his power? But the general secretary holds party meetings every day. Little by little, the party meetings will involve more of businesses and the general secretary will get more and more control of the businesses. This is a very intersting Game Theory within a SOE between the Chairman of BOD and General Party Secretary.
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