Political governance and firm performance in China: Evidence from a quasi-natural experiment

Abstract

The involvement of the Communist Party of China in corporate decision-making has formed a corporate governance model with “Chinese characteristics” that diverges from commonly studied governance models. This paper aims to provide direct insight into China’s corporate governance model by examining how the involvement of Party organizations in corporate governance influences the performance of private firms. To address endogeneity concerns, we use a quasi-natural experiment (i.e., sudden deaths of board directors) that leads to an exogenous change in the proportion of Party directors. Using difference-in-differences estimation, we find that an increase in the proportion of Party directors (i.e., stronger political governance) improves private firms’ performance. This finding is robust to various tests. Moreover, the channel analysis suggests that the Party organization performs advisory and supervisory functions in corporate governance. Last, we present evidence that the excessive involvement of the Party organization in corporate governance also imposes political costs on private firms.