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1802
October
2016
1803
matter how the linkage was formed, previous empirical research has confirmed the relevance of this
resource dependence logic in the Chinese context (Li
& Zhang, 2007; Peng, 2004; Peng & Luo, 2000; Zheng
et al., 2015).
1804
held by the blockholder (Gomes, 2000). This disciplinary effect will be particularly relevant when the
firm wants to revisit the equity market for offering
new shares from outside investors (Durnev & Kim,
2005). Thus, reliance on future equity financing
constrains blockholders opportunism.
In sum, these two mechanisms can mitigate the
blockholder agency problem through influencing
the power balance between the two types of shareholders. We develop theory articulating how board
political capital can influence blockholder opportunism via the two mechanisms. We first introduce
the Chinese context and then integrate it with our
theory development to derive testable hypotheses.
Research Setting
The Chinese equity market was once populated by
many former state-owned enterprises (SOEs), where
government agencies retained significant ownership
stakes after share issue privatization. It was not until
the late 1990s that private businesses started to float
shares. Regarding blockholder identity, a majority of
the parent SOEs were in turn controlled by regional
and central government agencies; private parent
companies were owned and managed by entrepreneurs and their founding teams.
No matter whether an original firm was state
owned or private, it typically underwent a process of
carve-out listing (Walter & Howie, 2006). That is,
the original firm carved out its profitable assets and
business units to establish a new corporate entity for
flotation. Meanwhile, the original firm was transformed
into a holding company, which received controlling
ownership stakes in the new entity. After the new
company was listed, outside investors became minority shareholders. Consequently, there exists a
fine line between the holding company and its listed
subsidiary in operational and financial issues. Many
executives are tied to the blockholders and have
a limited sense of obligation to outside investors.
On paper, minority shareholders in China enjoy
sound legal protection against appropriation. In
practice, however, such legal rules are ineffective,
owing to massive enforcement failures (Jiang et al.,
2010; Yiu, Xu, & Wan, 2014). Because the Chinese
judicial system is not independent of the state but an
extension of the political authority, regulatory agencies
play a more important role in investor protection.
Stock market regulation rests with the China Securities
Regulatory Commission (CSRC), which was modeled
after the U.S. Securities and Exchange Commission
and is supposed to enforce a uniform set of regulatory
October
2016
1805
1806
October
2016
1807
METHODS
Data and Sample
Our dataset included all Chinese manufacturing
firms listed on the Shanghai Stock Exchange or
Shenzhen Stock Exchange from 2008 to 2011.
Manufacturing firms represent the bulk of corporate China, and accounted for more than 60% of
the listed firms. The sector contains ten two-digit
subsectorsfood and beverage, textile, wood and
furniture, paper and printing, petrochemical, electronics, machinery, metallurgical, pharmaceutical,
and other manufacturingthat provide considerable industry variations. On the basis of a total of
1,295 manufacturing listed firms identified during
the study period, we excluded 197 firms that were
traded for less than one year and 52 firms with missing
data. This led to an unbalanced panel of 1,046 firms
and 2,854 firm-year observations.
In China, publicly listed companies are required to
disclose their directors biographical sketches (including education, professional experience, career
history, and current position) in their annual reports.
To study the political experience of board members,
we hired GTA Information Technology, the provider
of the China Stock Market and Accounting Research
(CSMAR) database, to manually code the political
experience of each individual director of all the
sample firms from the biographical sketches. A team
of four well-trained researchers spent six months
completing the coding of the directors. The coding
results were subsequently verified by the two bilingual co-authors. After excluding 83 directors with
missing information, a total of 32,174 individual directors were included in the study, with 11,739 independent. Among all the directors coded, 5,551
Measuring blockholder appropriation of corporate wealth is challenging, in that the practice is illegal and can take a variety of forms. Fortunately,
prior studies in the Chinese context (Jiang et al.,
2010; Liu & Tian, 2012; Qian & Yeung, 2015) have
identified a rather transparent form of tunneling
that borders on outright fund diversion to controlling blockholdersintercorporate loans recorded
as other receivables (OREC), an accounting item
in Chinese corporate balance sheets. Technically,
this account refers to any receivable amounts and
temporary prepayments other than those recorded
as notes and accounts receivables. In reality, given
that the disclosure requirements for OREC are not
well specified, this account reflects related-party
transactions for non-operational purposes, especially loans to parent companies and their unlisted
subsidiaries.
In short, tunneling through OREC has been regarded as a particularly brazen form of corporate
abuse, in which controlling shareholders . . . siphon
billions of RMB from hundreds of Chinese listed
companies (Jiang et al., 2010: 1). Therefore, we
measured the severity of large shareholder appropriation by the value of a firms other receivables over
total assets (ORECTA). Jiang and colleagues (2010)
documented the regulatory moves to curb the
abuse of ORECTA in the mid-2000s, but anecdotal
evidence suggests the persistence of this fund diversion practice. For instance, China Securities
Journal (2012) reported that a total of RMB 3.4
billion (U.S. $540 million) was diverted from 60
listed companies during 2011. In summary, while
ORECTA doesnt capture all blockholder rent appropriation, it serves as a valid and parsimonious
proxy in our research context.
1808
October
1.00
20.06*
0.61
0.49
1.00
20.01
0.29*
0.48
0.50
1.00
0.03
20.01
0.00
0.06
0.09
1.00
0.68*
0.08*
0.00
0.01
0.29
0.19
1.00
0.11*
0.10*
0.08*
0.02
0.02
0.13
0.07
1.00
0.18*
0.09*
0.11*
0.04*
20.02
0.00
0.36
0.05
1.00
0.05*
0.04*
0.03
0.02
0.34*
20.02
0.18*
0.26
0.44
1.00
0.08*
0.01
20.03
0.01
0.00
0.17*
20.01
0.14*
0.02
0.03
1.00
20.05*
20.13*
20.04*
20.00
20.01
20.00
20.24*
20.00
20.02
0.10
0.31
1.00
0.06*
20.10*
20.05*
0.06*
0.00
20.02
20.03
20.11*
0.03
0.05*
0.38
0.16
1.00
0.06*
20.01
0.00
20.02
0.02
20.01
20.01
20.02
0.03
0.02
0.01
0.48
8.49
1.00
0.00
20.02
20.01
0.02
0.02
0.02
0.00
20.01
20.02
0.04*
0.01
20.01
0.16
1.99
1.00
0.04*
0.00
20.07*
0.04*
20.12*
20.12*
0.02
0.04*
0.01
0.03
20.11*
0.05*
20.11*
0.49
0.38
1.00
20.09*
0.00
0.01
0.05*
20.08*
0.13*
0.18*
0.02
0.03*
0.05*
0.05*
0.25*
20.06*
0.79*
9.55
0.78
1.00
20.04*
0.09*
20.05*
0.02
0.21*
0.15*
20.02
20.20*
0.00
20.13*
20.11*
20.05*
20.35*
0.01
20.03*
21.49
1.30
1.00
20.19*
20.11*
0.24*
0.09*
20.01
20.14*
20.05*
20.04*
0.00
0.04*
0.08*
0.05*
0.03*
0.09*
20.01
20.09*
0.02
0.04
Table 1 presents descriptive statistics and pairwise correlations. The value of ORECTA is rather
significant in sample companies, with the sample mean
accounting for approximately 2% of the total assets.
Table 1 also demonstrates that, in our sample, on average, 29% of board directors possess political capital.
Variables
RESULTS
ORECTA
Firm Size
Provincial GDP
Leverage
Profitability
Sales Growth
Blockholder Ownership
Common Blockholder
Blockholder Balance
CEO Duality
Board Independence
Board Acc/Fin Ratio
Board PC Ratio
Outside Board PC Ratio
Private
Regulated Industry
Marketization
Mean
SD
10
9
8
7
6
5
4
3
2
TABLE 1
Descriptive Statistics and Correlation Coefficients
11
Statistical Approach
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
12
13
14
15
16
17
1809
1.00
8.69
2.00
2016
1810
October
0.04
6.41***
(1.02)
(0.23)
(1.91)
0.00
0.04
0.01
(0.72)
0.05
(21.36)
(21.55)
20.01
20.02
(0.41)
(0.75)
(21.47)
(2.09)
(3.00)
(23.77)
(0.31)
0.02
0.00
20.01
0.01*
0.002**
20.0002***
0.00
Model 1
(2.40)
0.02*
0.04
6.37***
(0.82)
(21.62)
(0.21)
(1.56)
(0.70)
(21.58)
(0.39)
(0.81)
(21.49)
(2.05)
(3.15)
(23.66)
(0.21)
0.01
20.02
0.00
0.03
0.05
20.01
0.02
0.00
20.01
0.01*
0.002**
20.0002***
0.00
Model 2
(20.36)
(2.30)
20.01
0.03*
0.05
5.89***
(0.33)
0.00
(0.77)
(21.66)
20.02
0.01
(0.36)
(1.49)
(0.69)
(21.57)
(0.45)
(0.78)
(21.42)
(2.05)
(3.19)
(23.55)
(0.26)
0.00
0.03
0.05
20.01
0.02
0.00
20.01
0.01*
0.002***
20.0002***
0.00
Model 3
0.05
6.13***
0.02
0.00
0.01
20.02
0.00
0.03
0.05
20.01
0.02
0.00
20.01
0.01*
0.002**
20.0002***
0.00
(1.68)
(0.44)
(0.84)
(21.56)
(0.22)
(1.58)
(0.67)
(1.57)
(0.38)
(0.88)
(21.56)
(2.09)
(3.15)
(23.60)
(0.18)
Model 4
0.05
5.80***
0.00
20.01*
0.07**
0.01
20.02
0.00
0.03
0.06
20.01
0.01
0.00
20.01
0.01*
0.002***
20.0002***
0.00
(0.86)
(21.98)
(2.52)
(0.76)
(21.69)
(0.16)
(1.45)
(0.76)
(21.62)
(0.26)
(0.73)
(21.19)
(2.00)
(3.18)
(23.75)
(0.31)
Model 5
0.05
5.55***
0.00
20.01**
0.02
20.01
0.04**
0.06*
0.01
20.02
0.00
0.03
(1.22)
(22.82)
(1.63)
(20.46)
(3.14)
(2.25)
(0.69)
(21.71)
(0.37)
(1.32)
(0.75)
(21.62)
20.01
0.06
(0.26)
(0.71)
(21.21)
(2.00)
(3.24)
(23.59)
(0.40)
0.01
0.00
20.01
0.01*
0.002***
20.0002***
0.00
Model 6
Notes: N 5 2,854. t statistics are in parentheses. Symbols , *, **, and *** denote statistical significance at 10%, 5%, 1%, and 0.1% levels respectively (two-tailed tests). The
variable Regulated Industry was omitted in Models 4 and 6 due to firm fixed-effect.
Constant
Firm Size
Provincial GDP
Leverage
Profitability
Sales Growth
Blockholder
Ownership
Common
Blockholder
Blockholder
Balance
CEO Duality
Board
Independence
Board Acc/Fin
Ratio
Inverse Mills
Ratio
Predictor
Board PC Ratio
Interactions
Private
Board PC Ratio
3 Private
Board PC Ratio
3 Regulated
Industry
Marketization
Board PC Ratio
3
Marketization
R2 (within)
F statistic
Variables
TABLE 2
Effects of Board Political Capital on Blockholder Rent Appropriation (Estimates for Heckman Second-Stage Models)
2016
Sun, Hu, and Hillman
1811
Yes
Yes
2397.69
136.06***
653
Yes
2400.92
129.60***
653
(22.52)
20.95**
Yes
(2.55)
(20.48)
(0.82)
(23.78)
(0.59)
(21.64)
(21.27)
(0.10)
(20.64)
0.46**
Yes
(2.46)
0.44**
218.68
0.82
20.28***
2.40
20.30
20.38
0.01
20.04
Model 2
Yes
(20.45)
(0.47)
(23.58)
(0.54)
(21.45)
(21.42)
(20.03)
(20.64)
217.51
0.45
20.26***
2.22
20.26
20.43
20.00
20.03
Model 1
Yes
2398.80
133.83***
653
Yes
Yes
21.69*
0.44**
216.97
0.86
20.26***
2.16
20.28
20.47
0.01
20.00
(22.01)
(2.45)
(20.44)
(0.84)
(23.58)
(0.53)
(21.50)
(21.48)
(0.07)
(20.63)
Model 3
Yes
2315.56
101.85***
408
Yes
Yes
0.23
222.85
20.32
20.25***
2.86
0.13
20.52
20.02
20.01
(1.25)
(20.57)
(20.31)
(23.45)
(0.68)
(0.56)
(21.57)
(20.20)
(21.16)
Model 4
Yes
2313.43
106.10***
408
Yes
Yes
20.81*
0.27
226.19
0.02
20.26***
3.28
0.10
20.43
20.01
20.01
(22.05)
(1.44)
(20.65)
(0.02)
(23.60)
(0.78)
(0.48)
(21.31)
(20.06)
(21.07)
Model 5
Yes
2313.22
106.53***
408
Yes
Yes
21.79*
0.23
(22.11)
(1.23)
(20.58)
(0.12)
(23.54)
(0.70)
(0.38)
(21.60)
(20.07)
(21.09)
Model 6
223.51
0.13
20.26***
2.94
0.08
20.54
20.01
20.01
Notes: t statistics are in parentheses. Symbols , *, **, and *** denote statistical significance at 10%, 5%, 1%, and 0.1% levels respectively (two-tailed tests).
Constant
ORECTA
Firm Size
Provincial GDP
Leverage
Profitability
Sales Growth
Blockholder
Ownership
Private
Predictors
Board PC Ratio
Outside Board
PC Ratio
Industry
dummies
Provincial
dummies
Year dummies
Log-likelihood
x2
Observations
Variables
TABLE 3
Poisson Regressions Examining the Effects of Board Political Capital on the Severity of Regulatory Sanctions
1812
Academy of Management Journal
October
2016
TABLE 4
Effects of Board Political Capital on Corporate Debt
Financing
Variables
Constant
Firm Size
Provincial
GDP
Profitability
Sales Growth
Blockholder
Ownership
Private
Board Size
Predictors
Board PC
Ratio
Outside
Board PC
Ratio
Industry
dummies
Provincial
dummies
Year
dummies
R2
F statistics
Long-Term Leverage
as Dependent Variable
Leverage as
Dependent Variable
20.45***
0.03***
20.02***
(210.39)
(18.48)
(26.23)
0.26
0.02*
20.02
(21.54)
(2.27)
(21.61)
20.00
20.00
20.0003**
(20.30)
(20.13)
(22.28)
0.01**
0.00
20.002***
(23.17)
(0.58)
(23.81)
0.01
20.00
(1.40)
(21.68)
20.02
0.00
(21.11)
(20.94)
0.02*
(2.05)
0.22**
Yes
Yes
Yes
Yes
Yes
Yes
0.35
67.15***
0.04
4.44***
(2.65)
1813
appropriation is more pronounced in heavily regulated industries. The interaction effect of Board PC
Ratio and Regulated Industry on ORECTA is positive
but marginally significant in Model 4 (b 5 0.02,
p , .10) and Model 6 (b 5 0.02, p , .10). Therefore,
we only receive qualified empirical support for
Hypothesis 3.
Hypothesis 4 predicted that the positive association between board political capital and blockholder
appropriation is less pronounced in firms residing
in regions with more-developed institutions. Using
Marketization as a moderator, Model 5 shows a significantly negative interaction effect of Board PC
Ratio and Marketization (b 5 20.01 p , .05). Similarly, the full Model 6 demonstrates a similar negative effect (b 5 20.01, p , .01). Results in both
models provide strong support for Hypothesis 4. To
shed further light on these moderating relationships,
we followed Aiken and West (1991) to plot the twoway interaction effects of Board PC Ratio and the
three moderating variables as illustrated in Figure 1.
Outside Board Political Capital as a Robustness
Check
While Board PC Ratio was used to measure political
capital of an entire board, we also used political capital embedded in independent directorsmeasured
by Outside Board PC Ratioas another explanatory
variable to test our hypotheses. Table 5 reports the
second-stage estimation results with the same model
specification. The estimations generate very similar
findings to those in Table 2, thus offering further
support for our hypotheses. These findings lend credence to our argument that political capital embedded in co-opted outside directors can harm the
interests of minority investors by heightening blockholder opportunism.
Implications for Firm Performance
While minority shareholders suffer blockholder
rent appropriation, one may wonder whether this
activity is necessarily bad for the whole firm. Similarly, if board political capital increases blockholder
opportunism, will this dark side of political capital
ultimately affect firm performance? Our supplementary analysis in Table 6 helps answer these
questions. First, we followed Jiang et al. (2010) to
study the performance consequence of ORECTA.
Using return on assets (ROA) and Profitability (operating profits divided by sales revenues) to measure
firm performance, we show in Models 1 and 4 that
1814
October
.015
Private
Low
High
The percentage of directors with political capital
.01
State
Non-regulated industries
Regulated industries
Low
High
The percentage of directors with political capital
ORECTA
.01
.02
.03
.01
.02
ORECTA
.03
ORECTA
.02
.025
.04
.03
FIGURE 1
Moderating Effects of Blockholder Identity, Industry Regulation, and Subnational Institutional Environment
Low
High
The percentage of directors with political capital
(2.67)
0.04**
0.05
6.48***
(0.29)
(0.87)
(21.45)
(2.08)
(3.00)
(23.65)
(0.25)
(21.64)
(0.73)
(0.28)
(1.62)
(21.71)
(1.02)
0.01
0.00
20.01
0.01*
0.002**
20.0002***
0.00
20.01
0.05
0.00
0.03
20.02
0.01
Model 1
(20.09)
(2.05)
20.00
0.06*
0.05
5.90***
(0.58)
(0.24)
(0.87)
(21.39)
(2.09)
(2.99)
(23.56)
(0.32)
(21.60)
(0.68)
(0.38)
(1.57)
(21.73)
(1.03)
0.01
0.01
0.00
20.01
0.01*
0.002**
20.0002***
0.00
20.01
0.05
0.00
0.03
20.02
0.01
Model 2
0.05
6.22***
0.04
0.01
0.01
0.00
20.01
0.01*
0.002**
20.0002***
0.00
20.01
0.06
0.00
0.03
20.02
0.01
(1.65)
(0.51)
(0.28)
(0.99)
(21.57)
(2.07)
(3.07)
(23.59)
(0.26)
(21.61)
(0.75)
(0.32)
(1.60)
(21.63)
(0.95)
Model 3
0.00
20.01
0.05
5.76***
0.11*
0.02
0.00
20.01
0.01*
0.002**
20.0002***
0.00
20.01
0.06
0.00
0.03
20.02
0.01
(0.48)
(21.45)
(2.06)
(0.31)
(0.84)
(21.18)
(2.07)
(3.04)
(23.74)
(0.32)
(21.65)
(0.76)
(0.24)
(1.55)
(21.76)
(0.95)
Model 4
0.00
20.01*
0.05
5.39***
20.00
0.08**
0.05
0.08
0.02
0.00
20.01
0.01*
0.002**
20.0002***
0.00
20.01
0.05
0.00
0.03
20.02
0.01
(0.70)
(22.01)
(20.16)
(2.79)
(1.90)
(1.40)
(0.29)
(0.98)
(21.31)
(2.07)
(3.14)
(23.60)
(0.45)
(21.57)
(0.72)
(0.42)
(1.43)
(21.72)
(0.86)
Model 5
Notes: N 5 2,854. t statistics are in parentheses. Symbols , *, **, and *** denote statistical significance at 10%, 5%, 1%, and 0.1% levels respectively (two-tailed tests).
Constant
Firm Size
Provincial GDP
Leverage
Profitability
Sales Growth
Blockholder Ownership
Common Blockholder
Blockholder Balance
CEO Duality
Board Independence
Board Acc/Fin Ratio
Inverse Mills Ratio
Predictor
Outside Board PC Ratio
Interactions
Private
Outside Board PC Ratio 3 Private
Outside Board PC Ratio 3 Regulated
Industry
Marketization
Outside Board PC Ratio 3 Marketization
R2 (within)
F statistics
Variables
TABLE 5
Effects of Outside Board Political Capital on Blockholder Appropriation (Estimates of Heckman Second-Stage Models)
2016
Sun, Hu, and Hillman
1815
0.11
0.26
62.29***
0.26
62.26***
(0.17)
0.26
53.32***
0.02
(22.58)
(0.21)
21.30**
0.03
(20.87)
20.09
0.14
58.29***
0.16
58.23***
0.13
58.12***
(20.18)
20.01
(27.14)
(20.14)
21.15***
20.01
Notes: N 5 2,854. t statistics are in parentheses. Symbols *, **, and *** denote statistical significance at 5%, 1%, and 0.1% levels respectively (two-tailed tests).
(0.40)
(5.44)
(26.23)
(17.09)
(21.04)
(20.08)
5.51***
20.30***
2.17***
20.00
20.04
(5.45)
(26.24)
(17.07)
(21.03)
(20.11)
5.52***
20.30***
2.17***
20.00
20.05
(5.59)
(26.36)
(17.23)
(21.14)
(20.09)
5.65***
20.30***
2.19***
20.00
20.04
(1.26)
(22.34)
(17.02)
(0.99)
(20.54)
0.41
20.03*
0.79***
0.00
20.12
(1.19)
(22.30)
(17.01)
(0.99)
(20.50)
0.38
20.03*
0.79***
0.00
20.11
(1.94)
(22.95)
(16.43)
(0.74)
(20.46)
0.62*
20.04**
0.75***
0.00
20.10
Constant
Firm Size
Leverage
Blockholder Ownership
Private
Predictors
ORECTA
Board PC Ratio
Outside Board PC Ratio
R2 (within)
F statistics
Model 6
Model 5
Model 4
Model 2
Model 1
Variables
Model 3
TABLE 6
Supplementary Analysis: Effects of Blockholder Appropriation and Board Political Capital on Subsequent Firm Performance
1816
October
2016
1817
1818
October
2016
1819
with various corporate stakeholders for rent creation and appropriation across different institutional
contexts.
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APPENDIX A
TABLE A1
Determinants of Having a Politically Connected Board
(Probit Estimates of Heckman First-Stage Models)
Board Political
Capital
Constant
ORECTA
Firm Size
Leverage
Profitability
Sales Growth
Blockholder
Ownership
CEO Duality
Board
Independence
Board Size
Private
Industry
dummies
Province
dummies
Year dummies
Wald x
Outside Board
Political Capital
20.66
20.28
20.04
0.03
20.33*
20.01
20.00
0.79
0.16
20.10**
0.27*
20.04
0.08
0.00
(1.17)
(0.20)
(23.28)
(2.26)
(20.43)
(1.38)
(0.71)
20.13
1.31*
(21.40)
(2.01)
0.07
1.89**
(0.83)
(2.96)
(6.09)
(0.61)
Yes
0.07***
0.09
Yes
(3.88)
(1.35)
Yes
0.12***
0.04
Yes
(21.06)
(20.36)
(21.28)
(0.29)
(22.23)
(20.63)
(20.31)
Yes
Yes
Yes
Yes
Yes
255.38***
Yes
Yes
107.81***
Yes