De-politicization and Corporate Transformation

Abstract: It is well understood that when firms get favorable treatment from the government primarily because of their political connections, they may operate inefficiently while enjoying market advantages over their unconnected peers. However, how firms respond to a sustained removal of their political connections has not been clearly studied. This paper evaluates an unanticipated reform in China that removed government officials from independent directorships in listed companies. Our evidence indicates that privately owned firms that employed government officials as independent directors pre-treatment became more productive, more innovative and more transparent, and invested more efficiently post-treatment.