The hidden cost of political connection: Evidence from China's stock market responses to land transactions

Abstract

We construct a matched database of land transactions and Chinese listed companies. By analyzing the stock market's reaction to these transactions, we investigate the hidden cost of political connections for firms. Our results show a negative market response to land deals by politically connected companies. This suggests that potential future political or legal risks associated with the land transaction could harm the firm. To strengthen our findings, we leverage the anti-corruption campaign as a natural experiment and employ a difference-in-differences approach. This analysis yields consistent results. Furthermore, we discover that short-term and long-term investors have differing views on political connections.