Politicians’ Hometown Favouritism and Capital Resource Allocation

Abstract

Drawing on social identity theory, we investigate whether politicians exhibit hometown favouritism when allocating scarce capital resources, and we explore how the intensity of politicians’ birthplace identity influences their tendency towards favouring hometown firms. Using the turnover of politicians responsible for the nationwide IPO approval process in China and the resulting ‘birthplace shock’ during the lengthy approval process for IPO applicant firms, we document the causal effect of politicians’ hometown favouritism on capital resource allocation. Hometown firms are on average 15 percentage points more likely to receive IPO approval. This effect is stronger when politicians have a stronger sense of birthplace identity. Moreover, we show that hometown favouritism distorts capital resource allocation. Thus, our findings extend the existing non-market strategy literature by incorporating a unique social identity perspective to elucidate the influence of powerful politicians on firm outcomes and the efficiency of societal capital resource allocation.