Essays on political economy, leader demographics and corporate finance: evidence from China

Recent trends suggest that political considerations in corporate financial decision-making have become of increasing interest to financial studies researchers. Firms make financial decisions in response to a given institutional setting (North, 1992; La Porta, 1997; and Aghion, 2004) and realise the importance of the trade-off between the delegation of power to leaders and the need to control them to avoid tyranny. China is an emerging market, and with a dramatic development over a short span of 40 years, she has stood firm as the world’s number two economic power. With the enormous size of the economy, which provides rich sources of information, and with her unique political-institutional settings, which leads to the coexistence of state-owned sectors and private sectors, our study of political factors of corporate governance, more specifically, the impact of political connections of business leaders on firm financial decision making and performance in the Chinese financial markets provides compelling new evidence which can inform the development of corporate governance theories, since leaders’ political connections and demographics have been an important focus and frontier in this area. This thesis aims to investigate the relationships between political connections and firm performance, political connections and the cost of debt, and leaders’ demographics and firm performance. Building on extant literature on these issues, it asks: To what extent does political connection affect firm performance and the cost of debt? To what extent does the leader's demographics affect firm performance? In this context, a leader is considered to be politically connected if he or she is 1) a current or ex-government official at all levels, including current or ex-members of the military department with a rank equivalent to a government official; 2) a current or ex-member of the National People’s Congress (NPC); 3) a current or ex-member of Chinese People's Political Consultative Conference (CPPCC). Leaders’ demographics include the leader’s gender, age, and education level. Based on a literature review of these issues, panel data methodology and the fixed effects method were applied for all three essays using a sample of all the Chinese listed firms from 2006 to 2016. We obtain our financial data from the China Stock Market and Accounting Research Database (CSMAR) provided by Guo Tai An Information Service (GTA). This database covers all the listed firms in the Chinese stock markets during the research period. Where political connection variables were not available in the CSMAR dataset, the leaders’ demographics, education levels, and career history information were manually collected for the whole sample from the firm's official annual reports and official financial websites, including Bloomberg.com, Yahoo Finance, Finance iFeng, etc. In the first chapter, we document a significant negative relationship between political connection and firm performance, which indicates that a leader’s political connection reduces firm performance. We employ the fixed effects method on the entire sample of Chinese listed firms from 2006 to 2016. Our finding shows that the general political connections and the board chair’s political connections are significantly negatively related to firm performance at the highest 1% level (three-star). The CEO’s political connection is also significantly negatively related to firm performance with a significance of 5% level (two-star). The findings also suggest that the board chair’s political connection is more powerful than the CEO’s political connection. We further employ estimations on sub-samples of SOEs and non-SOEs. We document a significant positive relationship between political connections and firm performance in non-SOEs which indicates that political connection is more beneficial for private listed firms. In the second chapter, we further conduct estimations on the relationship between political connection and the cost of debt. We document that political connections significantly negatively related to the firm's cost of debt. Panel data methodology and the fixed effects method are employed on the whole sample of Chinese listed firms, excluding firms in the Finance department from 2006 to 2016. The results are robust to different control groups. The research also contributes by separating the board chair and the CEO’s political connections and investigating their effects on the firm’s cost of debt further. Our finding indicates that CEOs and young leaders are more helpful in reducing the firm’s cost of debt. In the last chapter, we investigate the relationship between leaders’ demographics and firm performance using the entire sample of Chinese listed firms from 2006 to 2016. Panel data methodology and the fixed effects method are also employed. We document those female leaders and senior leaders significantly improve firm performance, while an education level of PhD and above also has a significant positive effect on firm performance. The results indicate that political connections and the leader's demographics do have an impact on firm performance. On this basis, it is recommended that Chinese listed firms use political connections and leaders’ demographics as key factors in designing and targeting their campaigns. Further research is needed to identify different political connections and education elements with more sub-sample tests to provide more evidence