This paper examines the role of local politicians’ patronage connections to top political leaders (i.e., the Central Committee of the Communist Party of China) in privatization outcomes. We find that connected local politicians are more likely to sell state-owned enterprises (SOEs) to corrupt buyers at substantially discounted prices. The SOEs purchased by corrupt buyers engage in significantly more fraudulent and corrupt activities following privatization and thus perform worse. For identification, we use the mandatory retirement ages of Central Committee members in a fuzzy regression discontinuity design. When local politicians lose their connections because Central Committee members step down after reaching mandatory retirement ages, we find a 14.4 percentage point drop in the likelihood of choosing corrupt buyers and a 90.13% drop in price discounts for privatization sales. Consequently, the privatized SOEs experience jumps in efficiency gains after the age cut-offs for mandatory retirement.

This article documents novel large-sample evidence on the informational role of interfirm ownership networks in bank lending. Using comprehensive loan-level data in China, we find that banks’ internal loan ratings at issuance predict subsequent delinquent events more accurately when borrowers are connected to banks’ existing customers via ownership networks. In post-issuance monitoring for delinquent loans, banks with access to ownership networks manage to downgrade their initial ratings before late payments. These findings suggest that ownership networks facilitate the transmission of private information for bank lending. Moreover, ownership networks are more important for transmitting information related to small and medium enterprises.