Anticorruption, Political Connections, and Corporate Cash Policy: Evidence from Politician Downfalls in China

60 Pages Posted: 12 Oct 2020

See all articles by Haohan Ren

Haohan Ren

School of Management, Fudan University

Xiaofeng Zhao

Lingnan University - Department of Finance and Insurance

Date Written: October 30, 2020

Abstract

We examine how firms change their cash policies in response to the downfall of corrupt politicians in China. We find that firms connected to their local government increase cash holdings when high-profile politician downfalls occur in the government. Consistent with the precautionary saving argument, the effect is stronger for firms that have greater investment opportunities or face greater financial constraints. Compared to unaffected firms, affected firms save more cash out of cash flows and have a higher marginal value of cash holdings. Overall, we show that the collapse of firms' political connections has significant impacts on those firms' financial policies.

Keywords: Anticorruption, politician downfalls, political connections, cash policy

JEL Classification: G32, D73

Suggested Citation

Ren, Haohan and Zhao, Xiaofeng, Anticorruption, Political Connections, and Corporate Cash Policy: Evidence from Politician Downfalls in China (October 30, 2020). Emerging Markets Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2725075 or http://dx.doi.org/10.2139/ssrn.2725075

Haohan Ren (Contact Author)

School of Management, Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Xiaofeng Zhao

Lingnan University - Department of Finance and Insurance ( email )

8 Castle Peak Rd
Tuen Mun
Hong Kong

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