This paper provides evidence on the cost of political interference on banks with Chinese Private Enterprise Survey data between 2002 and 2012. Using regional political turnovers as a proxy for political influence, we show that political motivations for future promotions distort the bank lending decisions and crowd out lending to private firms. Besides, firms with business connections are more sensitive to turnover, while political connections are not significantly affected. These lending distortions are more considerable where competition for future promotion is more intense and where incumbents have more influence over banks. Moreover, the effect is especially pronounced for small firms. As a result of reduced bank credit, firms’ total credit availability decreases and they have to cut investments. Overall, our results suggest that preferential lending to politically important sectors has negative spillovers and can lead to costly crowding-out of private sectors.

This study finds that reducing political influence over local courts weakens local government debt capacity. We establish this result by exploiting the staggered roll-out of a judicial centralization reform aimed at alleviating local court capture in China and find reduced judicial favoritism towards local governments post-reform. The majority of local government lawsuits are with contractors over government payment delays. The reform not only increases government lawsuit losses but also exposes their credit risk, as payment delays without court support signal government liquidity constraint. Investors respond by tightening lending and increasing interest rates, which curbs government spending.

Using a new case-level dataset we document a set of stylized facts on bankruptcy in China and study how the staggered introduction of specialized courts across Chi- nese cities affected insolvency resolution and the local economy. For identification, we compare bankruptcy cases handled by specialized versus traditional civil courts within the same city and filed in the same year. We find that specialized courts decrease case duration by 36% relative to traditional civil courts. We provide evi- dence consistent with court specialization increasing efficiency via selection of better trained judges and higher judicial independence from local politicians. We docu- ment that cities introducing specialized courts experience a relative reallocation of employment out of zombie firms-intensive sectors, as well as faster firm entry and a larger increase in average capital productivity.

In this paper, we empirically examine the relationship between government ownership, synchronicity and M&A performance in Chinese market. We found strong evidence to support “Helping Hand Hypothesis” that bidders with high government ownership yield better performance in both the short run and the long run. We also document a negative relationship between synchronicity measure and M&A performance. Various explanations have been offered to explain this phenomenon. In addition, we find both political influence and stock market valuation play an important role to forecast M&A outcome in China market. Within hot political period, government-related bidders yield better performance in the short run, while in high valuation period, public bidders receive higher premium.