7/2015
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 7/2015
Agenda Motivation Theoretical framework Research questions Preview of major findings Data, sample, and variables Empirical results Conclusions 7/2015
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 7/2015
Motivation (cont’d) We are motivated to examine how local official changes affect GDP growth at a micro or firm level – corporate capital investment 7/2015
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 Grabbing hands vs. helping hands 7/2015
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 7/2015
Theoretical framework (cont’d) Local government official turnover represents an important source of political uncertainty Chinese local officials possess significant political power in their jurisdictions in establishing (interpreting) the “game rules” Anecdotal evidence Our major prediction: political turnover leads firms to significantly reduce corporate investment 7/2015
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? 7/2015
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. 7/2015
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. 7/2015
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) 7/2015
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 7/2015
Data, sample, and variable (cont’d) 7/2015
Data, sample, and variable (cont’d) 7/2015
Data, sample, and variable (cont’d) 7/2015
Data, sample, and variable (cont’d) 7/2015
Data, sample, and variable (cont’d) 7/2015
Empirical results 7/2015
Empirical results (cont’d) 7/2015
Empirical results (cont’d) 7/2015
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. 7/2015
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). 7/2015
Empirical results (cont’d) 7/2015
Empirical results (cont’d) 7/2015
Empirical results (cont’d) 7/2015
Empirical results (cont’d) 7/2015
Empirical results (cont’d) 7/2015
Empirical results (cont’d) 7/2015
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. 7/2015
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. 7/2015
Thank you! Questions? Comments? tzhang1@udayton.edu 7/2015