Political Connections and Ownership Concentration: Evidence from Chinese Privately Owned Enterprises

Abstract: Based on a series of nationwide surveys of privately owned enterprises (POEs) in China, we explore the influence of the founder-owner’s political connections — specifically, former government cadre experience — on the ownership structure of Chinese POEs. Politically connected entrepreneurs have an incentive to retain control of their firms to exploit these connections, leading to more concentrated ownership structures. At the same time, Chinese officials and investors prefer more diffusely held, Western-style firms, meaning that less-concentrated ownership structures have greater legitimacy. We hypothesize a nonlinear relationship between the strength of the founder-owner’s prior political ties and ownership concentration by combining the efficiency and legitimacy effects, and present evidence consistent with this relationship.