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Political Uncertainty and Corporate
Investment: Evidence from China
By Heng An, Yanyan Chen, Danglun Luo, and Ting Zhang
Presenter: Ting Zhang, PhD
University of Dayton, Dayton, Ohio
@中南大学
Changsha, July 2015
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Agenda
Motivation
Theoretical framework
Research questions
Preview of major findings
Data, sample, and variables
Empirical results
Conclusions
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Motivation
Chinese economic miracle
The important and active role of Chinese local
government officials in advancing the economic
growth
China’s recent anti-corruption campaign
The ripple effects on the economy – signs of strain
and uncertainty
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Motivation (cont’d)
We are motivated to examine how local
official changes affect GDP growth at a micro
or firm level – corporate capital investment
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Motivation (cont’d)
Why China?
its economy is driven by investment, which
accounts for about 50% of the GDP
SOEs dominates: close relation with government;
sensitive to political uncertainty
Local government officials get game rules
o Grabbing hands vs. helping hands
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Theoretical framework
Firm capital investment decisions under
uncertainty (Dixit and Pindyck, 1994)
------ in the face of uncertainty, the option
value of waiting for better (but never
complete) information increases
------ firms thus prefer to withhold
investment opportunities until the
uncertainty is resolved
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Theoretical framework (cont’d)
Local government official turnover represents
an important source of political uncertainty
o Chinese local officials possess significant political power
in their jurisdictions in establishing (interpreting) the
“game rules”
o Anecdotal evidence
Our major prediction: political turnover leads
firms to significantly reduce corporate
investment
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Research questions
How does local government official turnover
affect corporate capital investment?
Will such an effect be different when the
nature of official turnover varies, e.g., external
appointment vs. local promotion?
Will such an effect be different across firms
with different ownership structure and
heterogeneous characteristics?
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Preview of major findings
 The official turnover significantly deters
corporate capital investment
 The negative effect becomes strong when
local official change occurs through an
external. appointment as opposed to a local
promotion.
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Preview of major findings (cont’d)
 The negative effect becomes strong for
SOES, capital intensive firms and for firms
deemed locally important.
 A high degree of political turnover is
associated with more volatile capital
investment.
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Data, sample, and variables
 Information on government official turnover
at the city level is manually collected from
various public resources
Firm level financial accounting information is
from the Chinese Industrial Enterprises
Database (maintained by China’s National
Bureau of Statistics)
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Data, sample, and variables (cont’d)
 Apply a number of screening criteria
 Final sample has 1,020,321 firm-year
observations from 2001 to 2009
 277 cities, including 484 heads and 560
mayors change
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Data, sample, and variable (cont’d)
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Data, sample, and variable (cont’d)
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Data, sample, and variable (cont’d)
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Data, sample, and variable (cont’d)
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Data, sample, and variable (cont’d)
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Empirical results
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Empirical results (cont’d)
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Empirical results (cont’d)
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Empirical results (cont’d)
Economic significance:
The coefficient for CHANGE_HEAD (column 1) is
negative and significant (β = -0.006, t = -8.51),
suggesting that firms decrease their capital
investment by approximately 0.6% , equivalent
to a reduction of capital investment by about
55.08 million RMB when they anticipate a
replacement of city head.
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Empirical results (cont’d)
• Using change of capital investment (ΔINV i,t) as
a dependent variable, we obtain the similar
results (Panel B of Table 4).
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Empirical results (cont’d)
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Empirical results (cont’d)
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Empirical results (cont’d)
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Empirical results (cont’d)
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Empirical results (cont’d)
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Empirical results (cont’d)
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Conclusions
Using hand-collected data on government
official changes for 277 cities in China, we
provide the first empirical study on the
political turnover effect in one of the world’s
largest developing economy.
A rich set of variables that capture both the
nature and degree of political turnover is
being constructed.
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Conclusions (cont’d)
Local government official turnover significantly
reduces firm capital investment.
A high degree of political turnover is associated
with more volatile capital investment.
Such effect becomes stronger for capital intensive
firms and for firms with large bargaining power
with the local government; and becomes stronger
for state-owned enterprises.
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Thank you!
Questions? Comments?
[email protected]
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