Political Turnover, Ownership, and Corporate Investment

Abstract

We examine the impact of political influence and ownership on corporate investment by exploiting the unique way provincial leaders are promoted in China. The tournament-style promotion system creates incentives for new governors to exert influence over investment in the early years of their term. We find a divergence in investment rates between state owned enterprises (SOEs) and private firms following political turnover. SOEs increase investment by 6.0% following the turnover while investment rates for private firms decline, suggesting that the political influence exerted over SOEs may crowd out private investment.

Keywords: Corporate investment, Political turnover, China, SOE, Grabbing-hand, Crowding out, Investment efficiency.

JEL Classification: G30, G31, G38