Business Cycles, Political Connectedness, and Firm Performance in China

Abstract

In this paper I examine the impact of firms’ political connectedness on firm performance in private listed Chinese firms in the manufacturing sector, exploiting a policy shock, that is, the 4-trillion-yuan ($586-billion) economic stimulus plan in 2009 in response to the 2008 financial crisis. I use the difference-in-difference (DID) method to estimate the impact of political connectedness, comparing the change of firm performance in association with the stimulus between politically connected firms and non-connected ones. I find that political connectedness, particularly executives or directors being political delegates, enable firms to have better access to bank credit but have no direct impact on firm sales. Moreover, the two types of political connectedness, being political delegates or former officials, have different impact on firm profitability.