Essays on the political economy of the firm

Existing work on the political economy of finance uses international or macro data, and little research has been done on the political and institutional dimensions of corporate governance at the firm level. This study consists of three essays, and constitutes an empirical investigation of (a) how the political connections of corporate management influences the corporate performance, (b) how the quality of government impacts corporate performance, and (c) how the personal interests of management and government interact in terms of firm valuation. Given the importance of guanxi (relationship), China is well suited for the study on the political economy of the firm. Unique dataset for the Chinese firms, including both structural and privatization data, are used for all three papers.; The first paper asks a question of whether the nature of management's political connections matters to the firm. Connections can be established by the corporate executives through inheritance or active development. When the nature of political connections of is not differentiated, the political connections of corporate CEOs and board chairs in general have stastistically insignificant impacts on the firm performance in China, reflecting both the benefits and costs of connections. With differentiation, it is found, however, that developed connections are associated with an improvement in firm performance, while inherited connections are associated with a decline in firm performance.; The second paper uses detailed institutional and economic data for provincial governments of China to see whether the quality of government influences the firm performance. This is the first study of this kind at the firm level, using quality indicators for provincial governments within a country. The diversity of economics, population, geography provides significant variability of the quality of governments within China. The results show that the performance of the firm is strongly influenced by the quality of its political institutions. Furthermore, we document that the degree of economic and political liberalization is particularly important. It is most intriguing that political freedom has significant impact on firm performance and productivity, even in a communist society. Classic economists such as Hayek (1944) conjected this decades ago, but it has not been documented at the firm level in a modern setting.; Using the initial public offering data, the third paper examines how the conflict of interests between management and state owners impacts on the pricing of IPOs for the state-owned firms undergoing partial privatization. We wish to establish a relation between the management's IPO decision and his future career path. We find that the IPO underpricing is a positive function of the management's political motivations. We further find that while the age and bureaucratic experience of the management are important, the post-IPO career of management depend also on how the management has handled the privatization process including the IPO pricing.