The Effect Of Political Connection On Corporate Governance

In the institutional environment of low marketization level,corporations generally have relationship with government and this relationship is called political connection.There is a certain gap between China’s marketization level and that of developed countries,and there still exists a great intervention to the economy by the government in China,political connections are common and complex among Chinese corporations,under such institutional environment,political connections are regarded by corporations as informal and protective institutional arrangements,which play a critical role in companies’ daily business activities and are of great importance to corporations,so the impact of political connections on the daily governance of the corporations is worthy of in-depth study.Corporations can obtain many scarce resources and conveniences through political connection,such as relaxed credit constraints,more government subsidies and lower industry barrier,which endow companies with competitive advantages and facilitate their development.However,as a special institutional arrangement,political connection also brings challenge to corporate governance.From the perspective of executive turnover,an important corporate governance activity,this paper focuses on the political connection of the executives and studies the impact of political connection on corporate governance.An effective corporate governance mechanism aims to alleviate agency problems that arise from the separation of ownership and control in modern corporations,enabling shareholders to effectively monitor and restrain managers,and to timely replace poor performing managers,thus the turnoverperformance sensitivity reflects the effectiveness of corporate governance.This paper focuses on the forced turnover of executives that reflects companies’ internal monitoring mechanism and uses the turnover-performance sensitivity as proxy for corporate control.Based on a sample of Chinese firms listed on A-share market from2010 to 2017,we first employ a probit model to examine the impact of political connection on executive turnover and the sensitivity between turnover and firm performance.Then we continue use this model to investigate whether this impact will persist in firms with alternative form of political power.Last we adopt DID model to explore whether the impact of political connection on sensitivity between turnover and firm performance will be restricted by the shock of anti-corruption policy.The empirical results show that:(1)Compared with executives with no political connection,executives with political connection have a lower probability of forced turnover and cause a weaker sensitivity between turnover and firm performance,which suggests that executives’ political connection distorts the normal corporate governance mechanism.(2)Compared with firms that have alternative political power,the weakened sensitivity between politically connected executives’ turnover and firm performance becomes more pronounced in firms with no alternative political power in place.(3)the anti-corruption policy significantly improve the sensitivity between politically connected executives’ turnover and firm performance,which suggest the politically connected executives bear no special value to firms under the impact of anti-corruption.From the perspective of executive turnover,our findings reveal the negative impact of political connection on corporate governance,and that this impact differs between firms with different political resources,as well as changes with the external environment.Though many literatures have studied the impact of political connection on corporate governance,there is no literature to explore this impact through executive turnover,and few studies examine this impact with the changes in external institutional environment.This paper provides a new perspective to the research on the political connection and corporate governance.While our findings extend the current research regarding this field,they also deepen the understanding towards the economic value of executives’ political connection in modern corporations.