Political turnover and related party transactions in Chinese state-owned enterprises

Abstract

This paper investigates the dual role of government involvement in Chinese firms, acting as both a “helping hand” and a “grabbing hand”, with a focus on state-owned enterprises (SOEs). We examine how political turnover influences related party transactions (RPTs), which may serve to prop up distressed firms or facilitate tunnelling at the expense of minority shareholders. We find that political turnover is associated with a significant decline in RPTs, a causal relationship supported by multiple analyses addressing endogeneity concerns. Further evidence suggests that SOEs reduce tunnelling when local governments face fiscal constraints and curb propping activities when firms are at risk of delisting or losing rights to issue new shares. The reduction in RPTs is more pronounced in firms with high initial RPTs, weak governance, or exposure to local corruption, and is amplified when new provincial leaders are outsiders. These findings suggest that political turnover acts as an external governance mechanism, disrupting entrenched rent-seeking practices and reshaping firm-level resource allocation.