Hierarchical Political Power and the Value of Cash Holdings

Abstract

This study examines the relationship between hierarchical political power and the value of cash holdings. To model the power structure, we utilize the hierarchical civil service system in China to distinguish between the holders of high- and low-level political power. We establish that directors with high-level political power increase the market value of cash, whereas those with low-level political power have no impact. Such effects are more pronounced in non-state-owned firms, in regions where politicians are subject to higher political pressure and in firms experiencing stronger agency conflicts. Further analysis shows that directors with high-level political power can increase the value of cash holdings through improved investment efficiency. Among directors with high-level political power, shareholders benefit most from the presence of those ranked at the Bureau-Department level. Our study provides original evidence that political hierarchy holds significance for investors’ valuation of cash holdings and emphasizes the importance of the heterogeneous nature of boards’ political capital in determining corporate value.