State Accountability, Decision Horizon, and Managerial Practices in Chinese Firms

Abstract : We examine whether external institutional linkages can affect management quality and its relationship to productivity in manufacturing firms. We draw on novel empirical evidence from China's transition economy, where state control cements legitimacy for a subset of firms. Using measures of management quality in Chinese firms from the World Management Survey (WMS), we observe large variation in average management practice levels across ownership types, with low scores for domestic private firms and high scores for state-owned firms, after controlling for firm size, labor skill level, and industry. We match the WMS management measures with firm's value-added total factor productivity (TFP) estimated using data from China's Annual Industrial Survey, and show that the magnitude of the relationship between management quality and TFP is larger at statistically-significant levels for state-owned firms compared to both domestic and foreign private firms. We trace these differences to individual practices, and find the practices most strongly associated with productivity in state-owned firms suggest long decision-making horizons and diverse goals beyond profit. Our findings suggest state firms, with access and accountability to state authorities, may be playing a "long game" to overcome a historical productivity disadvantage, whereas private firms may be more focused on short-term gains, affecting investments in, and payoffs to, management practices.

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Political Networks and Stock Price Comovement: Evidence from Network-connected Firms in China

Abstract : In this paper, we examine whether comovement in the stock returns of pairs of Chinese firms connected to the same political network are systematically shaped by the prevailing coordination vs. competition incentives of the network’s politicians. We find strong evidence that stock price comovement is affected by the embeddedness of the firm-politician tie within the network. Among pairs of firms connected to a network through a common politician, we document an increase in stock return comovement. For those pairs of firms connected to a common network via separate politicians (rather than a common politician), we document a relative decrease in stock return comovement. This negative effect suggests that the politicians’ relationships within these political networks are generally adversarial rather than cooperative in nature. This interpretation is supported by evidence that stock price comovement becomes even more negative (positive) in settings which are expected to increase competition (coordination) between the separate politicians (by the common politician).

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Sleeping with the Enemy: Political Connections and Firm Risk

Abstract : We examine the effect of political connections on market perceptions of firm risk, as measured by a firm’s (equity) beta, and provide causal evidence of an increase in risk when the government appoints directors to a firm’s board. To address endogeneity concerns we exploit a natural experiment in Argentina, where the nationalization of the country’s pension system gave the government the right to appoint directors to some firms’ boards. Our results are not driven by increases in financial leverage or changes in financial performance. We find evidence of a higher payout ratio in politically connected firms, which we suggest could result in increased risk of interference (or expropriation) in politically connected firms.

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