We study how firms build relations with local governments in emerging markets without established rules of political lobbying. We document that following a turnover of the Party Secretary or mayor of a city in China, firms (especially privately owned enterprises, POEs hereafter) headquartered in that city significantly increase their “perk spending,” for example, expenses for travel and entertainment among others. Both the instrumental-variable-based results and heterogeneity analysis are consistent with the interpretation that the perk spending is used to build relations with local governments. In addition, we find that local political turnover in a city tends to be followed by changes of the Chairmen or the CEOs of state-owned enterprises that are controlled by the local government. We also discuss and rule out several alternative explanations for the above findings.

We study whether sibling co-management affects the cost of capital for family firms in China. We find that sibling co-management strongly correlates with a lower cost of capital. We identify three mechanisms through which sibling co-managers (including directors) influence the cost of capital: providing coinsurance, enhancing corporate governance, and facilitating communication with investors. Furthermore, the effect is more pronounced for firms operating in regions with weaker legal environments and firms with auditors from non-Big 4 accounting firms. However, sibling co-management may also hinder external financing due to higher uncertainty during family power transfer periods. In addition, the value of sibling co-management is more salient for financially constrained firms and those in which at least one of the co-manager siblings has a finance background. Overall, the findings suggest that family firms benefit from sibling co-management, resulting in a lower cost of capital, despite the challenges that arise during family power transfer.

We examine the relation between political uncertainty and cash holdings for firms in China. We document that, during the first year of a new city government official's appointment, a firm, on average, holds less cash, which is consistent with the grabbing hand hypothesis of politician. Our results are robust to alternative measures of cash holdings, instrumental variable estimation, sub-samples without firms in four major cities, a matched sample approach, and placebo tests. In addition, our additional analyses suggest that a firm holds significantly less cash if: (a) the newly appointed official is from a different city relative to that from the same city, (b) it faces high political extraction risk, and (c) it has strong twin agency conflicts. Lastly, our extended results suggest that the market value of cash holdings is significantly negative during periods of political uncertainty and firms hide their cash by moving it to related firms via related party transactions.

We examine whether a specialized asset of family firms, founders' political connections, influences the second generation involvement in family firms in China. We further investigate the impact of such second generation involvement on firm performance. The findings suggest that founders' political connections are a critical factor in the decision of second generation involvement, with politically connected founders more likely to appoint a second generation as a family firm chairman, CEO, or director. The results are consistent with the transfer cost hypothesis of Bennedsen et al. (2015). Moreover, we document that second generation involvement enhances firm performance, with the curtailment of tunneling as an important channel of performance improvement. Our results are robust to different empirical models and controlling for possible endogeneity issues. In addition, second-generation effects are more pronounced in firms with less outside monitoring.

We examine the impact of an anti-corruption campaign on analyst earnings forecast optimism. Using hand-collected site visits data by the Central Inspection Team (CIT) in China that began in 2013, we document higher analyst optimism during CIT visit periods than during non-CIT visit periods. The results are robust to matched samples, placebo tests, alternative fixed effect and clustering specifications, endogeneity of CIT site visits concern, and alternative samples. Additional analysis suggests that local government pressure and firm bad-news-hiding explain the findings but it is not consistent with the improved firm fundamentals interpretation. Moreover, we find that the effect of CIT visits on analyst optimism is more pronounced for star, non-affiliated, and experienced analysts, supporting the notion that, because of their greater influence, local governments focus on pressuring these analysts. More important, the impact of CIT visits on analyst optimism is more salient if a CIT leader had previous work experience or longer work experience in the inspected province. Interestingly, we document a reversion in analyst earnings forecast optimism 60 days after CIT site visits, especially among the non-state-owned firms, suggesting that, after the CIT investigation, analyst optimism is no longer needed.

Using a unique database in China, we extend the literature to further distinguish the information production role of star vs. non-star analysts. We confirm the general conclusion of a positive association between analyst coverage and stock return synchronicity measured by a firm’s R2 in China. The findings from star analysts, however, show that star analyst coverage actually decreases stock return synchronicity. We contend that the firm-specific human capital in star analysts helps the analysts overcome the challenges of information production in an emerging market. The superior firm-specific human capital argument of star analysts is further supported by the negative association of star analysts’ firm-specific experiences and stock return synchronicity. Our conclusions are robust to different specifications of star analyst presence and different definitions of analysts’ firm-specific experiences. We also find that star analysts exhibit a more accurate earnings forecast than non-star analysts.

Using a sample of Chinese firms from 2000 to 2018, we document that hometown firms (firms with hometown chairpersons) engage in less green innovation than non-hometown firms. Evidence suggests that local stakeholders offer hometown chairpersons more protection from environmental consequences than non-hometown chairpersons. We identify two possible mechanisms: government patronage and accommodation by local supply chain partners. Furthermore, we find that the double standards are alleviated with insignificant difference in corporate green innovation when non-hometown chairpersons marry hometown spouses or build local political relationships. Additional analyses suggest that (1) the double standards drive hometown firms to emit more pollutants than non-hometown firms, (2) when a firm is under government scrutiny for environmental issues, located in the city with severe air pollution, or in heavily polluting industries, the adverse effect of a chairperson's hometown on green innovation is minimal, and (3) our findings on green innovation also extend to a decrease in the number of pollutant treatment facilities and treatment capacity in a firm.

We examine the impact of lifetime work experience of top executives on mergers and acquisitions (M&As) behavior and outcome. Based on hand-collected data of top executives in a sample of Chinese firms during 2002–2018, we construct a generalist ability index of top executives to study the impact of generalist top executives (GTEs) vs. specialist top executives (STEs) on M&As. Our findings suggest that GTEs conduct more M&As than those of STEs. The results are robust to alternate specifications of M&A frequencies and after accounting for endogeneity issue. Furthermore, the M&A announcement and long-term returns are better for acquirers with GTEs than those with STEs. We attribute the findings to GTEs' ability of searching target ex ante, making the M&A process efficient, and fully leveraging their social networks post M&A. In addition, we find the increase in M&A activities in GTE firms are primarily due to GTEs' experience of M&As rather than their talents. Finally, the M&As from GTEs improve investment efficiency and are less likely to divest targets post M&As. In sum, GTEs conduct more M&As and they create value in the process.

We investigate the impact of excess perk consumption on crash risk in state-owned enterprises in China. To enjoy excess perks, executives in state-owned enterprises have an incentive to withhold bad news for extended periods, leading to higher future stock price crash risk. Consistent with this assertion, we find a positive correlation between excess perks and crash risk. The findings are robust to the inclusion of other determinants of crash risk identified in the literature, such as earnings management, conditional conservatism, and firm-level corporate governance mechanisms. The results still hold after accounting for possible endogeneity issues using a two-stage least squares estimation. Earnings management (conditional conservatism) helps amplify (lessen) this impact. Moreover, better external monitoring mitigates the impact of excess perks on firm crash risk. We further find that the impact of excess perks on crash risk is more pronounced in firms whose executives are approaching retirement and persists for at least two years.