Political uncertainty and allocation of decision rights among business groups: evidence from the replacement of municipal officials

Mangmang Li, Yuqiang Cao*, Meiting Lu, Hongjian Wang

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

A firm trades off information transfer costs and agency costs to determine the distribution of decision rights to lower-level management. Using the replacement of municipal officials as an exogenous shock of political uncertainty, we find a business group is more likely to delegate decision rights of cash resources to subsidiaries when political uncertainty is high. The association is only evident among non-state-owned-enterprises (non-SOEs) and not SOEs. Additional tests show that the delegation of decision rights is more pronounced among firms with weak internal control and those located in cities where local governments have replaced their party secretary. We also find that firm decentralization can enhance investment efficiency and the marginal value of cash in the presence of high political uncertainty. Overall, our findings support the decentralization theory, and provide causal evidence on how political uncertainty influences allocation of decision rights among listed firms in an emerging economy with large state ownership.

Original languageEnglish
Article number101541
Pages (from-to)1-15
Number of pages15
JournalPacific-Basin Finance Journal
Volume67
DOIs
Publication statusPublished - Jun 2021

Bibliographical note

Funding Information:
We gratefully acknowledge financial support from National Natural Science Foundation of China (Grant Nos. 71972057 , 71962020 , 72072045 , 72072079 , 71902078 ). All errors and omissions are our own.

Publisher Copyright:
© 2021 Elsevier B.V.

Copyright:
Copyright 2021 Elsevier B.V., All rights reserved.

Keywords

  • decentralization theory
  • decision rights
  • information transfer costs
  • political uncertainty

Fingerprint Dive into the research topics of 'Political uncertainty and allocation of decision rights among business groups: evidence from the replacement of municipal officials'. Together they form a unique fingerprint.

Cite this