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Top executives in state-owned enterprises (SOEs) in China can be promoted to government sectors. This is regarded as political promotion. Using hand-collected turnover data for top executives in SOEs and adopting a time-varying difference-in-differences design, we find that firm risk is significantly lower in the years immediately before the political promotion of top executives, when their incentives for political promotions are stronger. Moreover, strong industry tournament incentives counteract the impact of political promotion incentives on firm risk. This study supplements tournament theory and enhances our understanding of how different incentive mechanisms interact and affect firms’ choices vis-à-vis their risk-taking activities.

Political Promotion Incentives and Firm Risk: Evidence from State-owned Enterprises in China