The Impact Of Political Forces On Firm Value

There is a series of economic literature on the implications of political forces in the business world.The presence of strong political forces is frequently a key factor contributing to weak institutional environments and outcomes especially in developing economies.Numerous papers argue that politics can shape economic outcomes,affect asset prices,and change financial risk.Yet only a few studies explore how political forces influence managerial decisions at the corporate level.We attempt to fill this gap in the literature by providing firm level evidence on how government officals' site visits,regarded as political connection,affect the incentives of listed firms;how political uncertainty surrounding provincial leaders'elections affects investment-to-price sensitivity;and how government officals' site visits occruing with provincial leaders' elections affects capital allocatin efficiency.First,we use government officials' corporate site visits as a measurement of political connection and examines how political connection affects firm performance.Using a novel dataset on government officials' site visits,we find that government officials' site visits are not random and the number of visits by officials increases over time.Firms with better past performance,more assets,higher financial leverage,younger age,and low largest shareholder's holding are more likely to receive government officials' visits.Also,firms located in provinces with a higher GDP growth rate are more likely to receive official visits.We examine the effect of officials' site visits on firm performance and find that firms' return on assets,return on equity,and total factor productivity increase following officials' site visits,suggesting that the political connection formed through officials' site visits are beneficial to firms.Moreover,firms gain more access to investment projects and bank loans.Firms' corporate governance improves,and information asymmetry decreases following officials' visits.The effect of government officials' visits is stronger for non-SOEs than SOEs,suggesting that corporate on-site visits by government officials is more valuable for firms that lack political connections.Additionally,the stock market reacts positively towards government officials' corporate site visits,suggesting that investors interpret official visits as government endorsement and support.We also provide evidence that the effect of political connection is stronger in the absence of political corruption,indicating that political corruption is not the precondition for political connections to be valuable.Then,we argue that during periods of increased political uncertainty,stock prices play a limited role in guiding corporate investment decisions.Using political turnover as our sample of politically uncertain events,we find that during turnover years,investment is less sensitive to stock prices,the drop in investment-to-price sensitivity is larger when turnover are less certain,and the drop in investment-to-price sensitivity is associated with lower post-turnover company performance.Furthermore,we propose two explanations for the above findings.According to the information view of investment,we find that during election years,the amount of firm-specific information in stock prices is lower.The information view also suggests that managers would rely less on stock prices if they become relatively more informed than outside investors in the face of increased political uncertainty.Our second explanation is the political view of investment.We find that,in line with this view,the droin investment-to-price sensitivity is more pronounced in firms with close contact with the government.Finally,we document that the effects of both government officials' site visits and government officials' turnover on corporate investment efficiency.We find that the efficiency of corporate investment improves after officials' site visits,with overinvestments falling and underinvestment rising,while,only coming from local government officials' site visits.Central government officials' site visits have no effects on corporate investment efficiency.We also examine the effects on different type of firms seperately,which include local SOEs,Central SOEs,non-SOEs,private firms and political-connected firms.Consistent with the hypothesis,we find that during turnover years,local SOEs considerably over-invested,while the efficiency of local SOEs investment improves after officials' site visits.We make sure that officials' turnover happened before officials' site visits.Moreover,are crowd out on new investment projects during turnover years,and officials' site visits are beneficial again to non-SOEs.which get more new investments.The effects on private firms or political-connected firms are similar with non-SOEs.We therefore conclude that political forces have a real impact on corporate performance by officials' site visits or by altering how managers respond to stock prices when making investment decisions,which contribute to the literature on the effects of political forces on capital allocation and firm value.Our research also shed light on the new definition of political connection and political turnover.