Political promotion of CEOs of state-controlled firms in China: A state capitalism view

Previous research views political promotions of CEOs of Chinese state-owned enterprises (SOEs) as an incentive that compensates for weak monetary rewards. Taking a state capitalism perspective, we suggest that the government uses political promotions as a mechanism to reallocate human capital resources for its economic and political objectives. This approach entails potential trade-offs between macro-level gains and micro-level losses, as valuable and rare human capital is diverted from SOE management to political posts. Based on 1,077 CEO-year observations of 226 listed Chinese SOEs, we find that both financial and political performance have a positive effect on the political promotions of CEOs. However, when the SOE is more in need of the CEO’s managerial skills—specifically, when the SOE’s industry has a private-firm leader or the SOE holds higher prominence within its enterprise group—the positive relationship between financial performance and political promotion is weakened. In comparison, the positive relationship between political performance and political promotion is weakened to a lesser extent. Additional analysis reveals that SOEs whose former CEOs received political promotions tend to experience a decline in performance in the years following the promotions, compared to pre-promotion years, as well as to firms whose former CEOs have been demoted.