Depoliticization and corporate cash holdings: Evidence from the mandated resignation of directors in China

Yuyuan Chang, Xiaofei Pan, Jianling Wang, Qing Zhou

Research output: Contribution to journalArticlepeer-review

Abstract

The 2013 depoliticization regulation (Rule 18) in China mandates government officials to resign from board positions in public firms, terminating firms' political connections established through these directors. Exploiting this regulation as a quasi-experiment, we document that politically connected firms increase their cash holdings 12.7% more than non-connected firms because of these resignations. This pattern is more pronounced among firms that rely more heavily on the government for external resources. Among state-owned firms, the pattern is more evident in firms that are more deeply privatized. In addition, firms that lose political ties experience a significant decline in obtaining bank loans and government subsidies, and they are also slower to adjust their cash holdings toward the optimal level. These findings underscore the role of corporate political linkages in facilitating firms' access to resources that “soften” firms' budget constraints.
Original languageEnglish
Article number102004
Pages (from-to)1-18
Number of pages18
JournalJournal of Corporate Finance
Volume69
DOIs
Publication statusPublished - Aug 2021

Keywords

  • Political connection
  • Independent director
  • Corporate cash holdings
  • Financial constraint
  • Privatization

Fingerprint

Dive into the research topics of 'Depoliticization and corporate cash holdings: Evidence from the mandated resignation of directors in China'. Together they form a unique fingerprint.

Cite this