China's national promotions and firms' decision making

Abstract

Employing a sample of 17,534 firm year observations across 31 provinces over 2000-2013 in mainland China, this thesis examines the role of China’s political tournaments in corporate decision making. We first document that investment rate is systematically higher before national tournaments, controlling for investment opportunities and economic conditions. Specifically, we show an average increase of 7.0% investment rates two years before national tournaments. We further examine the tournament effects on tax decisions and show that firms on average pay 4.1% more taxes in the year leading up to national tournaments. Using a sample of firms dual-listed in both mainland and Hong Kong exchange, we show that the Chinese government is likely to intervene into the market around national tournaments. Finally, we introduce additional firm aspects including employment, wage, cash holding, debt, stock return, and stock volatility in order to investigate how these variables are influenced simultaneously. We show that the results for investment and tax are consistent with our findings. In addition, we also find that firms tend to raise debts to fund the extra investments. The market reacts negatively as these investments serve politicians at the costs of shareholders. We also discover a temporary growth in employment and wage before national tournaments. Further, evidence shows that China’s national tournaments are not likely to raise political concerns. Our finding is consistent with political leaders influencing firms’ decisions to win political tournaments.