Political connection and firm diversification: evidence from China
2023; Taylor & Francis; Volume: 56; Issue: 50 Linguagem: Inglês
10.1080/00036846.2023.2267822
ISSN1466-4283
Autores Tópico(s)Corporate Taxation and Avoidance
ResumoABSTRACTConnections give diversified firms an advantage. This study investigates whether firms will be less diversified when the connections to the government are abruptly interrupted, using a dataset on the firm's subsidiaries and the political connectedness of all listed private firms in China. In 2013, an unanticipated reform intended to combat corruption forced all politically connected independent directors of listed firms to resign. We find that those affected firms become less diversified after the reform. The estimation results are not driven by changes in the number of subsidiaries, government development goals, CEO's political incentives, or other commercial system reforms. Placebo events for SOEs and firms' academic background yield no effects. The effects are larger for local connections and stronger institutions. We also find that depoliticized firms are less likely to enter regulated and profitable industries and acquire less government economic support. Our results suggest that diversified firms could be 'parasites' of the economic-political institutions in emerging markets.KEYWORDS: Political connectionfirm diversificationinstitutional environmentsChinaJEL CLASSIFICATION: D23G38L22P35 Disclosure statementNo potential conflict of interest was reported by the author(s).Notes1 A diversified firm is usually formed by several legally independent subsidiaries operating in multi-line businesses simultaneously (Montgomery Citation1994).2 See https://www.nytimes.com/2015/04/29/world/asia/wang-jianlin-abillionaire-at-the-intersection-of-business-and-power-in-china.html for Dalian Wanda Group and https://www.washingtonpost.com/world/2022/12/09/india-coal-gautam-adani-godda for Adani Group.3 See https://www.cs.com.cn/ssgs/gsxw/201407/t20140729_4462560.html (in Chinese, last accessed January 8, 2023).4 The regulation stipulated that only the leading party or government officials shall not take jobs in firms. However, in the following notice, named 'Responses to relevant issues in No. 18 Regulation' issued by the General Office of the Organization Department on December 4, 2013, all civil servants, including those non-leading officials, shall not take jobs in firms.5 See https://www.nbd.com.cn/articles/2014-03-07/814856.html (in Chinese, last accessed January 8, 2023).6 See http://www.gov.cn/xinwen/2014–07/22/content_2722590.htm (in Chinese, last accessed January 8, 2023).7 'Responses to relevant issues in No. 18 Regulation' stipulates that 'For leaders of firms who have been elected to serve as leaders of the NPC, the CPPCC, the Association for Science and Technology, and the Federation of Industry and Commerce, etc., those who are leaders of SOEs and public institutions shall be dealt with in accordance with regulations; others shall not be included in the scope of liquidation'. Thus, ordinary people serving in the NPC and the CPPCC were unaffected.8 The data for 2017 is lacking because the raw data from CSMAR is not complete.9 For instance, manufacturing firms disclosed 5,593 unique sector names during our sample period (2010–2017). The mean and median of the number of unique sector names reported are 613 and 328 across all sections, according to our estimates (there are 20 sections altogether). The data of the firm's segment information is acquired from the Wind Info.10 See 'Guidelines for the Content and Format of Information Disclosure by Listed Companies (No. 2)'. http://www.gov.cn/gongbao/content/2002/content_61795.htm (in Chinese, last accessed January 8, 2023).11 Since we do not have the two-digit industry code of each subsidiary, we use a broader definition of diversification, the number of sections, which can incorporate both horizontal and vertical diversification (Du, Lu, and Tao Citation2015). The classification of sections is as follows: (1) Agriculture, forestry, animal husbandry, and fishery; (2) Mining; (3) Manufacturing; (4) Production and supply of electricity, heat, gas, and water; (5) Construction; (6) Wholesale and retail trade; (7) Transportation, warehousing and postal services; (8) Accommodation and catering; (9) Information transmission, software, and information technology services; (10) Financial; (11) Real estate; (12) Leasing and business services; (13) Scientific research and technical service; (14) Water conservancy, environment and public facilities management; (15) Residential services, repairs, and other services; (16) Education; (17) Health and social work; (18) Culture, sports and entertainment; (19) Public administration, social security, and social organization; (20) International organizations. This classification is similar to the 21 sections in the International Standard Industrial Classification of All Economic Activities.12 The 'Regulations on the Administration of Company Registration of the People's Republic of China' stipulates that 'When the company registration items are changed, if the relevant change registration items are not handled in accordance with the provisions of these regulations, the company registration authority shall order the company to register within a time limit. Those who fail to register within the time limit shall be fined not less than 10,000 yuan but not more than 100,000 yuan. Suppose the change of business scope involves items that laws or administrative regulations must approve but not yet approved, and the firm does engage in such business activities without authorization. In that case, her business license shall be revoked in serious cases'.13 Nevertheless, it should also be noted that this measure may underestimate firm diversification since we need to find out between those investments clustered in the same section but in different two-digit industry classifications.14 We also obtain another version of the subsidiaries' information from the China Stock Market & Accounting Research (CSMAR) database considering data quality. We mainly use data from CNRDS for two reasons: (1) CSMAR does not report the holding type of each subsidiary's parent company, making it impossible to tell between associated companies and subsidiaries. In this case, we may overstate the firm diversification. (2) There are many missing values of the subsidiary's industry and founding time, making it hard to calculate firm diversification using subsidiary information from CMSAR. The CNRDS platform is maintained by Shanghai Jinghe Information Technology Co., Ltd. and designed according to the MSCI ESG KLD STATS database, which has over one thousand institutional users. The CSMAR database is developed by GTA Information Technology Co. Ltd., the University of Hong Kong, and the Hong Kong Polytechnic University.15 The inverse propensity score weight for the treatment group is defined as 1/ei, and the control group is defined as 1/1−ei, where ei is the propensity score.16 The coefficients of columns (3)-(4) are larger than columns (1)-(2), which can be interpreted as the former may overestimate the impact of depoliticization on firm diversification. Since government officials affected by the No. 18 regulation are mainly IDs, who want to earn part-time money rather than the CEO, CFO, etc.17 This 25% rate is also robust to other specifications, such as 30%, 40%, and 50%.18 This reform was started in the 1990s and gradually expanded to nearly all cities in China. At the end of 2018, 336 of 337 cities in China have established at least one administrative approval center.19 This reform was launched around 2012 in several pilot cities of Guangdong province and implemented nationwide in 2014. See 'Reform Plan for Registered Capital Registration System' issued by the State Council on February 4, 2014.20 This reform started in 2015 and was promoted to all provinces in 2019. See 'Opinions of the State Council on Implementing the Market Access Negative List System' issued by the State Council on October 19, 2015.21 The 'Qichacha' platform provides information on all firms registered in China and is one of the official agencies for firm credit investigation.22 We defined some industries to be regulated as we do not have a two-digit industry code for each subsidiary. The regulated industries here are defined as Mining, Utilities, Transportation, Information Transmission, Finance, and Real Estate, following Fan et al. (Citation2017) and Wang and Luo (Citation2019).23 Profitable industries are those industries with the highest three-period moving average roa.24 The results here are inconsistent with Fan (Citation2021), mainly because of their dependent variable, the cumulative abnormal return. It is reasonable for shareholders to be more pessimistic when losing a central connection than a local one.25 Including reducing government intervention in enterprises (Market1), reducing local protection in the commodity market (Market2), marketization of credit fund allocation (Market3), and maintaining the rule of law environment in the market (Market4).26 Ding et al. (Citation2023) find that after firms lose political connections, their connections with banks are more useful in loan access.Additional informationFundingThis work was supported by the Fundamental Research Funds for the Central Universities, and the Research Funds of Renmin University of China [22XNH001].
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