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.

Corporate philanthropy is increasingly seen as an effective way to promote social equity. This paper estimates the effect of donation tax deduction policy on corporate donations. Using data from Chinese A-share listed companies, we find that the donation tax deduction policy has a significant positive effect on the amount donated. This finding remains robust to a number of robustness tests. Meanwhile, our study also suggests that the policy increases donation participation. Finally, heterogeneity analysis suggests that the effect is significant only for firms with high media attention and political connections. Our findings provide important evidence for the optimizing of social welfare.

We examine communication of political connections in corporate China, and show that politically inclined positive words—words in connotation of political sentiment—serve as a distinct and effective signaling device for corporate political connections. Using a large sample of corporate news, we find that news’ political sentiment, instead of orthodox political measures such as occurrences of political nouns and political entities, reflects executives’ political connections for private enterprises, and is related to rent-seeking benefits in government subsidy, tax refund, financing constraints and political risk. Our results demonstrate that political sentiment is an effective way to decode subtle corporate political connections in modern China’s “Mind Politics” environment that infiltrates into private corporations.

We examine communication of political connections in corporate China, and show that politically inclined positive words—words in connotation of political sentiment—serve as a distinct and effective signaling device for corporate political connections. Using a large sample of corporate news, we find that news’ political sentiment, instead of orthodox political measures such as occurrences of political nouns and political entities, reflects executives’ political connections for private enterprises, and is related to rent-seeking benefits in government subsidy, tax refund, financing constraints and political risk. Our results demonstrate that political sentiment is an effective way to decode subtle corporate political connections in modern China’s “Mind Politics” environment that infiltrates into private corporations.

Research has argued that state-owned enterprises (SOEs) should bear more social responsibility than other listed firms, because their own goals include maintaining social stability and promoting social welfare. In contrast with the privatization of SOEs observed in other countries, in China, some listed firms’ major shareholders have become SOEs in recent years. This transition offers a good opportunity to investigate the impact of ownership change on firms’ corporate social responsibility (CSR). Using the propensity score matching difference-in-differences method, we document that the CSR performance of these firms does not improve when their ownership structure changes, and it can even worsen. Our results remain robust to a series of tests. Further investigating the underlying economic mechanism, we uncover those political connections, bank financing, and government subsidies play critical roles in determining the negative effect of ownership structure change on public firms, which is consistent with the soft budget constraint framework. In an additional analysis, we find that CSR performance is poor for manufacturing industry firms after ownership structure change. After calculating the frequency of keywords appearing in the annual reports of such firms, we find them to be satisfied with their new SOE background after ownership structure change. Our paper provides a possible explanation for the phenomenon of SOEs becoming major shareholder of listed firms.

We examine the impact of political connections on the investment decisions of Chinese mutual funds. We identify a direct link between mutual funds’ political connections and stocks held from the same political network using hand-collected information on the professional backgrounds of Chinese mutual fund managers and fund management company (FMC) shareholders. While mutual funds tend to allocate more investments to stocks based on their political connections, this effect alleviates somewhat after the 2012 anti-corruption campaign. Our findings suggest that anti-corruption campaigns can help to reduce the political effects of government-related agencies on fund holdings and contribute to better market fairness.

We examine communication of political connections in corporate China, and show that politically inclined positive words—words in connotation of political sentiment—serve as a distinct and effective signaling device for corporate political connections. Using a large sample of corporate news, we find that news’ political sentiment, instead of orthodox political measures such as occurrences of political nouns and political entities, reflects executives’ political connections for private enterprises, and is related to rent-seeking benefits in government subsidy, tax refund, financing constraints and political risk. Our results demonstrate that political sentiment is an effective way to decode subtle corporate political connections in modern China’s “Mind Politics” environment that infiltrates into private corporations.

Unlike equity analysis where analysts follow a small group of firms and exercise discretion in incorporating firm-specific knowledge, ESG ratings that intend to capture firm ESG risk are produced through a largely unified model that incorporates a set of common disclosures decided by each rater. Against this backdrop, we assess the ability of local and global ESG ratings in capturing covered firms’ ESG risk in China. We use firm-level negative ESG incidents that occur within a year of ESG ratings’ release as a proxy for raters’ ESG risk assessment and examine whether local and foreign ratings have differential predictive ability. We find that local ratings better capture ESG risk that relates to social and governance issues on corruption, employment conditions, and regulatory violations, which often require the local context to incorporate. The outperformance is also salient among firms that rely on relationship-based transactions and political connections. Our results suggest that the local rater uses local knowledge to inform its model, which makes the ratings more relevant to ESG risk.

We investigate whether and how political connections penetrate through headquarter-subsidiary relationships. Our results show that even though the headquarters of politically connected listed firms pay comparable land prices as other firms, their subsidiaries pay 12.1-13.2% less. The price discount, driven by corruption rather than government subsidies, is exacerbated when the land is sold through informationally opaque supply methods and when land is for commercial or residential use. The anti-corruption campaign has successfully mitigated such price distortions. Our findings also show that better legal protection and private sector development are crucial for fair markets.

Using land transaction data in China, we investigate whether and how political connections penetrate through headquarter-subsidiary relationships. The results show that even though the headquarters of politically connected listed firms pay comparable land prices as other firms, their subsidiaries pay 12.1-13.2% less. The price discount, driven by corruption, is exacerbated when the land is for commercial or residential use and is disposed of through informationally opaque supply methods. The anti-corruption campaign has successfully mitigated such price distortions. Our findings also show that better legal protection and private sector development are crucial for fair markets.