Nexus effect: unraveling the impact of political patronage connections on corporate investment

Ping Guo; Guifeng Shi; Gary Gang Tian

doi:10.1017/S0022109025000067

Nexus effect: unraveling the impact of political patronage connections on corporate investment

Ping Guo
, Guifeng Shi
, Gary Gang Tian^*

^*Corresponding author for this work

Department of Applied Finance

Research output: Contribution to journal › Article › peer-review

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Abstract

This study investigates how political patronage influences local firms' investment decisions in China, focusing on changes in patronage ties resulting from provincial leadership turnover. By examining prefectural officials with connections to their provincial superiors, we find that firms in these regions experience increased investment expenditures, albeit with reduced efficiency. This effect is primarily driven by stronger promotion incentives for local officials, bolstered by favoritism from provincial patrons. While political patronage helps address agency problems within political hierarchies, our findings highlight its adverse economic impact due to misaligned interests between politicians and the public.

Original language	English
Pages (from-to)	4035-4064
Number of pages	30
Journal	Journal of Financial and Quantitative Analysis
Volume	60
Issue number	8
Early online date	14 Mar 2025
DOIs	https://doi.org/10.1017/S0022109025000067
Publication status	Published - Dec 2025

Bibliographical note

© The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington. Version archived for private and non-commercial use with the permission of the author/s and according to publisher conditions. For further rights please contact the publisher.

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10.1017/S0022109025000067Licence: CC BY

Publisher version (open access)Final published version, 394 KBLicence: CC BY

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title = "Nexus effect: unraveling the impact of political patronage connections on corporate investment",

abstract = "This study investigates how political patronage influences local firms' investment decisions in China, focusing on changes in patronage ties resulting from provincial leadership turnover. By examining prefectural officials with connections to their provincial superiors, we find that firms in these regions experience increased investment expenditures, albeit with reduced efficiency. This effect is primarily driven by stronger promotion incentives for local officials, bolstered by favoritism from provincial patrons. While political patronage helps address agency problems within political hierarchies, our findings highlight its adverse economic impact due to misaligned interests between politicians and the public.",

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AB - This study investigates how political patronage influences local firms' investment decisions in China, focusing on changes in patronage ties resulting from provincial leadership turnover. By examining prefectural officials with connections to their provincial superiors, we find that firms in these regions experience increased investment expenditures, albeit with reduced efficiency. This effect is primarily driven by stronger promotion incentives for local officials, bolstered by favoritism from provincial patrons. While political patronage helps address agency problems within political hierarchies, our findings highlight its adverse economic impact due to misaligned interests between politicians and the public.

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Nexus effect: unraveling the impact of political patronage connections on corporate investment

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