Government connections and the persistence of profitability: Evidence from Chinese listed firms

We find that state owned enterprises (SOEs hereafter) have lower (higher) mean-reverting rates when profitability is better (worse) than the norm; while non-SOEs with politically connected executives have lower (higher) mean-reverting rates when profitability is extremely better (worse) than the norm. In addition, SOEs controlled by the central government have lower mean-reverting rates than those controlled by local governments. Our results are robust to a series of robustness tests and a test using alternative measures of profitability. We argue that government connections help firms maintain a relatively competitive advantage and thus have an important influence on mean-reverting patterns of profitability for Chinese firms.