Previous theoretical and empirical studies suggest that CEOs' political connections are valuable to firms. We examine whether such connections become entrenched if the expected political capital fails to materialize and the firm lacks other types of political power. Using a sample of listed non-SOEs in China, we show that politically connected CEOs have a lower probability of turnover and cause a weaker turnover-performance sensitivity than non-politically connected CEOs. Further analyses show that these turnover patterns are not consistent with alternative explanations, such as superior managerial ability, being a member of controlling families or being promoted from the inside. The turnover patterns are less pronounced in firms with alternative political power, such as connected boards or being vital to the local economy. Following the turnover of politically connected CEOs, firm performance does not necessarily undergo significant improvement. Our results call for new theories that comprehend the real effects of political connections.

Using a panel of Chinese firms over the period 2003–2013, we show that, from the supply-side perspective, as a result of the implementation of the economic stimulus package in China, state-owned enterprises (SOEs) received more bank loans and invested more than non-SOEs. We further find that after the implementation of the economic stimulus package, bank lending became less responsive to firm profitability, and firm investments became less responsive to investment opportunities for SOEs, non-SOEs from favoured industries and regions, and non-SOEs with political connections. Overall, our findings support the view that the stimulus package and the associated increase in bank loan supply in China resulted in more resources being allocated to SOEs.

We investigate the effects of governors’ hometown favoritism on the corporate investments of Chinese listed firms. Exploiting the exogenous distribution of governors’ tenure in a difference-in-differences research design, we find that firms in an incumbent governor's hometown make higher investments by 10.26%. This favoritism effect is more pronounced when any of the following are true about a governor's hometown: has a culture background of high collectivism, has strong clan culture, uses a minor local dialect, or if the governor has strong clan ties. Additional analyses rule out the social ties generated through living or working experiences as an alternative explanation. Neither political connections nor self-interest incentives explain the effects of hometown favoritism. Furthermore, the increased investments are overall detrimental for investment efficiency.Our study contributes to the literature by applying the social identity theory in corporate research and provides novel evidence on how politicians’ social identity affects corporate investment.

In this study, we investigate how informal institutions, namely, chief executive officers' hometown connections with suppliers, impact firms' access to trade credit. Using unique data manually collected from China, we find that hometown connections significantly increase access to trade credit. The hometown effect is more pronounced for non-state-owned firms, firms in provinces with poorly developed financial institutions, and firms whose chief executive officers come from hometowns with a strong merchant guild culture or hold an important position in the hometown's chamber of commerce. We suggest two plausible channels for the hometown effect: information and social trust. Overall, this study contributes to the literature by documenting how hometown connections help firms to obtain external financing in emerging markets.

This study examines how holding voting shares in banks can impact the improvement of firms’ investment efficiency in the Chinese capital market. We found that bank ownership improved firms’ investment efficiency by mitigating both overinvestment and underinvestment and by improving investment sensitivity to investment opportunities. We further found that alleviation of overinvestment in firms was driven by the enhancement of corporate governance (disclosure channels). The better corporate governance in bank holding firms reduced corporate cash holdings and controlling shareholder expropriations. Moreover, we found that this bank-firm connection reduced underinvestment by mitigating financial constraints (financing channels), through the raising of more bank loans and the reduction of the cash flow sensitivity of cash holdings. This connection also served as a buffer when bank lending is tightened. Finally, we found that bank ownership had a more pronounced impact on improving investment efficiency in non-SOEs, in firms located in provinces with low marketization, and in firms without institutional investors.