Political Connections, Industry Entry Choice and Performance Volatility: Evidence from China

Based on dataset of Chinese listed manufacturing firms over the period 2008-2019, we examine the effect of the choice of industry entry as a mediating factor between political connections and firm performance volatility. The empirical results suggest that politically connected firms have more performance volatility, and political connections increase the likelihood of entering an emerging industry of national strategic importance or subject to entrance regulations. We further find that this choice leads to performance volatility at politically connected firms. Moreover, development of the institutional environment can reduce the effectiveness of political connections.

Automated summary

The study shows that politically connected firms are more likely to enter emerging industries of strategic importance or subject to entrance regulations, leading to performance volatility. Moreover, the development of the institutional environment can reduce the effectiveness of political connections.