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Do checks on bureaucrats improve firm value? Evidence from a natural experiment
Author(s) -
An Jiafu,
Armitage Seth,
Hou Wenxuan,
Liu Xianda
Publication year - 2020
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12705
Subject(s) - obedience , natural experiment , value (mathematics) , misconduct , communism , politics , state ownership , china , quality (philosophy) , business , discipline , economics , market economy , finance , political science , emerging markets , law , philosophy , statistics , mathematics , epistemology , machine learning , computer science
This paper studies the impact on firm value of tighter checks on bureaucrats’ behaviour. We use as a natural experiment the revision in 2015 by the Communist Party of China (CPC) of its regulations on disciplinary actions. We document a positive and substantial market reaction following this unexpected policy change that tightened and formalised constraints on bureaucrats’ misconduct. The impact is less pronounced for firms with state ownership, firms having CEOs or directors with CPC membership, and firms that operate in provinces with better institutional quality. The subsequent revision in 2018 that enforced political obedience is not associated with a positive market reaction.