Using hand-collected data on changes of government officials in 277 Chinese cities, we examine how political turnover affects corporate investment in a transitional economy. We find that political turnover leads firms to significantly reduce corporate investment, particularly when the new official is an outsider appointed by a higher level government. The effect of political turnover on corporate investment is stronger for state-owned enterprises, capital intensive firms, and firms deemed locally important. Overall, the volatility of corporate investment increases with political turnover. Finally, the investment decline due to political turnover has significantly negative impact on the profitability of private firms, but not state-owned firms.

We construct a unique political connection index to capture variations in the strength of firm political relations in China. The index incorporates various channels through which a firm's executives, chairperson, directors, and other senior officers are politically connected with government officials and bureaucrats. Overall, there is a negative relation between our index and firm value for the full sample, but such negative relation mainly exists for state-owned enterprises (SOEs) and it becomes positive for non-SOEs. Furthermore, close examination shows an inverted U-shaped relation between political connections and firm value for the full sample in general and for non-SOEs in particular: Firm value increases initially at a lower level of connections and then begins to decrease at a higher level. The findings are consistent with the different business objectives and motivations of SOEs and non-SOEs in seeking political connections. Finally, our findings are robust after controlling for potential endogeneity and using an alternative headcount index construction method.