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17/2015
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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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AgendaMotivationTheoretical framework Research questionsPreview of major findingsData, sample, and variablesEmpirical resultsConclusions
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MotivationChinese economic miracleThe 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 GDPSOEs dominates: close relation with government;
sensitive to political uncertaintyLocal government officials get game rules
oGrabbing 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 uncertaintyoChinese local officials possess significant political power
in their jurisdictions in establishing (interpreting) the “game rules”
oAnecdotal evidence
Our major prediction: political turnover leads firms to significantly reduce corporate investment
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Research questionsHow 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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