De-politicization and corporate risk-taking

Abstract

We examine the impact of China's de-politicization regulation Rule 18 on corporate risk-taking. This rule mandates government officials to step down from their positions on the boards of public firms, thereby severing the political ties through official directors. Employing a staggered difference-in-differences design, our study reveals that the collapse of political connections results in a significant decrease in the level of risk-taking among politically connected firms. Furthermore, we identify bank credit and direct government support as plausible channels through which these effects manifest and highlight the presence of heterogeneous effects across different contextual factors.