The empirical context of this study is an authoritarian regime that has recently been through a major political reshuffle—China. Nevertheless, the assumption that no other unobserved factors have affected changes in corporate philanthropic donations during the ten-year observation period can be too strong, given the pace and scope of change in China. 3 For example, see “Global Political Uncertainty Weighs on Growth Outlook,” Ian Talley, Wall Street In our context, we use the number of convicted government officials in each province as a proxy for political market uncertainty. https://doi.org/10.5465/amj.2009.0548, Werner, T. (2015). The economic incentive that aligns the interests of firms and governments is GDP growth (Haveman et al., 2017). with policy makers/regulators for favorable policy/regulatory treatment or other resources valuable to the firm (information, loans, etc.) The first is the total number of convicted government officials. For one thing, there might be considerable noise in the actual corruption crackdown process. 2011) as a proxy. Risk vs Uncertainty Without uncertainty there is no risk. Fan, G., Wang, X., & Zhu, H. 2011. This paper investigates the relationship between the turnover of prefecture-city officials and the inherent risk faced by local firms in China. The standard error would be biased if we treat PMU as if it was randomly assigned to firms within the province. Variables that affect both the treatment status and the outcome can interfere our causal inference. https://doi.org/10.5465/amp.2012.0042. The subjective part of the uncertainty, on the other hand, is caused by incomplete information or information asymmetry between the less informed entities and the more informative entities. imf.org. A sudden, unexpected jump in uncertainty is likely to restrict trade and cause the market to shrink. https://doi.org/10.1086/527495, Griffin, J. M., Liu, C., & Shu, T. (2018). https://doi.org/10.5465/AMJ.2006.23478676. Political investment is more important to larger and more visible firms. Li Jing, Xia Jun, & Zajac Edward J. Key to this is the work by Nobel Laureate Buchanan and Tullock (1962), who propose that the policy making process in democracies is a market process. Firm Resources and Sustained Competitive Advantage. We consider the convicted official’s rank to be high if his rank is provincial-level or above. https://doi.org/10.1287/mnsc.32.10.1231, Baron David P. (2004). … Bertrand, Duflo and Mullainathan (2002) point out that incorrect ways of dealing with standard errors in DD models often lead to false positive inferences and overestimations. Scholars use the framework to analyze firms’ tendencies to participate in political markets (e.g. Journal of Political Economy, 115(6), 1020–1048. International Variation in the Business-Government Interface: Institutional and Organizational Considerations. The treatments in this study are (1) being “assigned” high/low PMU and (2) had achieved political affiliations. Fourth, other studies, for example, Huang et al. <> In the robustness check section, we try an alternative measure of PMU: first investigated provinces. Government officials almost have absolute power over firms. Strategic Management Journal, 35(8), 1103–1123.     political market uncertainty (PMU). If the uncertainty is uncontrollable (i.e. Sometimes it takes an expert to fully understand the consequences of a policy. This paper examines the effect of economic policy and political uncertainty and its components on stock market performance and firm’s investment in United Kingdom and United States. The uncertainty associated with the crackdown of a top provincial official (e.g. Griffin, Liu and Shu (2018) identified 150 investigated and convicted CEOs of listed firms. Nevertheless, in authoritarian regimes such as China, politically-motivated corporate philanthropy is particularly salient (Zhang, Marquis and Qiao, 2016). The treatment dosage assigned to a particular province in a specific year may not reflect the actual PMU perceived by firms, because the investigations take time and government officials at risk are likely to start taking measures since the onset of the campaign. The exchange is much more relational than contractual (i.e. Using the quasi-natural experiment created by the U.S. gubernatorial elections over the 1976 to 2013 period as a source of plausibly exogenous increase in political uncertainty, we show that heightened political uncer- https://doi.org/10.3386/w8841, Bonardi, J.-P., Hillman, A. J., & Keim, G. D. (2005). <> The anticorruption campaign not only shocked the public realm, but also reached into the corporate world. Strategic Factor Markets: Expectations, Luck, and Business Strategy. State owned enterprises (SOEs) were not immune to anticorruption investigations. A Study of Corporate Charitable Donations of Chinese Firms. We investigate changes in the political activities of listed firms in China during the anticorruption campaign. more incomplete contracts), and there is a greater focus on long-run rather than short-run benefits. The political ties approach has been well documented by the literature. For example, the ratings firm Standard & Poor's cited political uncertainty among the chief reasons behind its unprecedented downgrade of the U.S. Treasury debt in August 2011. ID 3095686). https://doi.org/10.1002/smj.2096, Hope, O.-K., Yue, H., & Zhong, Q. (2018) estimate that a sizable amount of corporate charitable donations in the U.S. were politically motivated. Registered Data Controller No: Z1821391. A political reshuffle generates uncertainty on the supply side. It is also possible that firms and government officials didn’t take the announcement seriously when the campaign first started, and only came to realize its seriousness after a year. Beijing, China: Economics Science Press. Perverse Complementarity: Political Connections and the Use of Courts among Private Firms in China. The Central Commission for Discipline Inspection (CCDI) keeps a record of indicted high-level officials on its website. Fisman, R., & Miguel, E. (2007). Our second hypothesis concerns the purity in the purpose of the political investments. Table 1. governor or mayor) is certainty different from that associated with the crackdown of an administer in a town. https://doi.org/10.1002/smj.4250080209, Zhang, J., Marquis, C., & Qiao, K. (2016). While certain political investments (e.g. Following Zhang et al. Regional characteristics (GDP per capita, number of NGOs, marketization level, population). In the absence of individual interest, there is no interest” (1987: 246). The following are illustrative examples of uncertainty avoidance. Corporate philanthropic contributions are especially appreciated when local governments have limited resources of their own (Dickson, 2003). A Transaction Cost Theory of Politics. https://doi.org/10.1177/014920639101700108, Barney, J. The prosperity of the market economy is accompanied by the by-products of increased income inequality, which threatens social stability. The most famous manifestation of political risk is the expropriation; i.e. The CDI has clear classification of the rank of the convicted officials. This practice is consistent with prior studies in other contexts. Political strategies in authoritarian regimes. We extend our approach to other countries, finding elevated levels of economic policy uncertainty abroad, as well. The best we can do is to use observable proxies to observe uncertainty indirectly. https://doi.org/10.5465/amj.2016.0543, Jia, N., Shi, J., & Wang, Y. We examine political market uncertainty in an authoritarian regime – China, where a recent anticorruption campaign has generated considerable turbulences in regional political markets. Our first main independent variable is political market uncertainty (PMU). In October, 2013, the CPC passed “Rule 18” which forbids government officials to serve as board members of listed firms. If we actually observe a significant effect, the measurement problem only makes the true effect greater than what we estimated (assume there is no endogeneity problem, which we address with the choice of control variables and estimators). Below we discuss several important characteristics of political markets: supply- and demand-side rivalries, incomplete information, transaction cost and uncertainty. The purer the purpose of a political investment in serving political purposes, the more affected is the investment by a sudden increase in political market uncertainty. Prior studies find that firms with government officials as board members are more likely to engage in reciprocal exchanges with the government and are more likely to make charitable donations. Rochester, NY: Social Science Research Network.     Our main dependent variable is Corporate charitable donations. Firms’ political strategies are tailored to suit the specific leaders they try to access. https://doi.org/10.1177/0951692890002004001. (Working Paper No. This is not an example of the work produced by our Dissertation Writing Service. Despite the many differences between democracies and authoritarian regimes, factors that make political markets in democracies imperfect apply to political markets in authoritarian regimes, too. For cases with no donation, we code the variable as zero. (1947). The political uncertainty surrounded by the turnover of government officials has a major impact on local economies and local firms. Studies find firms with greater need for government resources make greater amounts of charitable donations (Zhang et al., 2016) and benefit more from corporate philanthropy (Wang and Qian 2011). If early arrival of an inspection team signals the region being a main target of the campaign, the first-investigated regions are likely to have high PMU. The first question North (1990) asks is: how do interest groups know their interests? The DD method allows us to filter the effect of other unobserved changes. Alternatively, firms may choose to spread out its resources and mitigate risk through strategy diversification. Integrated market and nonmarket strategies: Political campaign contributions around merger and acquisition events in the energy sector. Since some studies point out that some CEO investigations are not published on the website, we follow those studies to manually search in CSMAR for CEO dismissal events. 9th Dec 2019 Governments in authoritarian regimes often play a more important role in the economy and have greater influences on firms. the face of uncertainty. Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UKDiss.com. Tourists looking to relax will often rule out destinations with any hint of instability. Exchange in political markets are essentially trading for future commitments. The government also enacts successful business leaders to the provincial or national People’s Congress (PC) or to the Chinese People’s Political Consultative Conference  (CPPCC). On the duality of political and economic stakeholder influence on firm innovation performance: Theory and evidence from Chinese firms. (1987). Sudden increases in uncertainty lead to substantial consequences in firms’ strategic decisions. https://doi.org/10.1177/0001839216657311, Hillman, A., & Keim, G. (1995). Rochester, NY: Social Science Research Network. The second limitation of political markets is high transaction cost and uncertainty. Management Science, 32(10), 1231–1241. We code the variable as “1” if any of the firm’s top leaders was investigated. We therefore try alternative time windows of eight years, six years and four years for robustness check. Adapting corporate strategy to extreme political uncertainty first requires evaluation of the nature and the scope of uncertainty. Periods of political uncertainty in Ukraine have affected the pace of change. The Journal of Politics, 76(2), 318–332. Incomplete information, transaction cost and uncertainty. Consider the effect of a major political reshuffle (i.e. Tens of thousands of lower-level officials were investigated and convicted. We handle time information in two ways. endobj For example, stock markets around the world rebounded by around 2% on January 2, 2013, following a last-minute deal by the U.S. Congress to prevent tax increases and federal budget cuts.1 Likewise, in the run-up to the 2016 U.S. Presidential election global markets tumbled on news that Donald Trump had closed the gap on Hillary Clinton (Stewart and Rogers 2016). Although over the past forty years the country has achieved impressive marketization progress and economic development, the political structure remained the same. Gaining Access by Doing Good: The Effect of Sociopolitical Reputation on Firm Participation in Public Policy Making. That happens when uncertainty stays at a relatively stable level. There are no voters. Those evidence suggest that firms invest in political markets calculatedly, and supplier-side rivalry is certainly one dimension they carefully consider. Among the 13 seats on the provincial standing committee, only three remained two years after the initiation of the campaign. 2, s$]�3X'�Q�TO�|��.�ŊiifF��?�D>]lh����墼Ƈ��˙�. NERI Index of Marketization of China’s Provinces 2011. Other market characteristics such as uncertainty are largely ignored. The Academy of Management Review, 30(2), 397–413. it is difficult to attribute outcomes of corporate behavior to political uncertainty as the two are endogenously determined. This discussion leads to our main hypotheses: H1. Technically, if there is no other unobserved factor that leads to abnormal changes in corporate charitable donations during our observation window, we can use an OLS model to identify the effect of PMU (controlling for natural time trend). “Achieved political connections indicate more of an ongoing exchange relationship between business elites (and their organizations) and the government” (Zhang et al., 2016:1311). https://doi.org/10.5465/AMR.2003.9416341. Translating the measures into PMU, we indicate PMU with “high,” “moderate” or “low” dummies based on the quantiles (top 25% – high; bottom 25% – low; 25% – 75% – moderate) the values are in. Future studies can investigate the determinants of a firm’s capability in navigating political market uncertainty, or the heterogenous responses among firms when faced with such uncertainty. Government officials rely on GDP growth for promotions. ID 3092504). Smith, A. The effect of global political uncertainty on equity prices increases with a country’s equity market exposure to foreign investors. The reason why we do not use firm-year as the unit of observation only is that there is likely to be strong cross-time spillover. Chang and Wu, 2013; Jia, Huang and Zhang, 2018; Wang & Qian, 2011) marketization index developed by the National Economic Research Institute (NERI) (Fan, Wang and Zhu. Regardless of the nature of the campaign, it has certainty generated an exogenous shock to regional political markets, with some regions being impacted more and some regions being impacted less. Empirical evidence are largely corroborative. They are characterized with costly information, subjective models on the part of the actors, and imperfect enforcement of agreements. The second measurement problem arises from the inaccuracy of the information from the CDI website. It creates a sudden exogenous shock to the supply side of political markets, enabling us to observe the impacts of increased uncertainty on corporate political investment. B. EMPIRICAL SETTING The empirical context of this study is an authoritarian regime that has recently been through a major political reshuffle—China. Moulton, B. R. (1986). The measure of uncertainty largely depends on the context. For simplicity, we follow prior research (Fisman and Miguel, 2007) and treat all time-varying control variables as if they were constant. In authoritarian regimes going through economic reforms, firms rely on connections to officials to navigate policy uncertainty (Haveman et al., 2017). Intuitively, the greater the number of officials who are affected by the anticorruption campaign, the greater political turbulence the campaign has induced in the province. First, information is imperfect, costly and asymmetric. Is the Chinese Corporate Anti-Corruption Campaign Authentic? Therefore, we introduce a second measure –  number of convicted high-level officials. In this paper, we study political uncertainty associated with national elections (see Bialkowski et al., 2008; Research on corporate political strategy in China often study observable outcomes such as government official board membership (e.g. Registered office: Venture House, Cross Street, Arnold, Nottingham, Nottinghamshire, NG5 7PJ. This problem arises from difficulties in measuring the rights being traded and difficulties in enforcing the exchange of rights. Even two members of the Central Committee of CCP were removed, which had never happened before in history. Policy makers are appointed rather than elected. Ang and Jia (2014) investigate how political connectedness affect the use of courts to resolve disputes for firms in China. Moral uncertainty leads to consensus, which in turn results in healthy, progressive, and efficacious outcomes for nurses, nursing, and society. That is to say that when outcomes are fully known in advance, decisions can be optimized to minimize losses. In addition, most ways of making political investments in China are fuzzy and ambiguous. Political Market Uncertainty and Corporate Political Investments: An Examination of Corporate Charitable Donations around a Political Reshuffle. In the United States, much uncertainty surrounded the government bailouts during the finan- ... For example, Baker, Bloom, and Davis (2013) find that this uncertainty, measuredbytheirindex, increasesunemploymentand reducesinvestment. As Buchanan notes, “the relevant difference between (economic) markets and politics does not lie in the kinds of values/interests that persons pursue, but in the conditions under which they pursue their various interests. Our sample consists of all public firms listed on Shanghai and Shenzhen stock exchanges from 2008 to 2017. Casual observation suggests that political events in one country can affect asset markets in another. With two leadin… Rodrik (1991) and Pindyck and Solimano (1993) are prominent examples of this literature in which the uncertainty brought about by political factors leads firms to choose lower levels of investment ex-penditures. To calculate average rank, we code the rank of central government officials and the “first-hands” of provincial and municipal government officials as 5, other provincial and municipal government officials as 3, and the rest as 1. https://doi.org/10.1111/j.1430-9134.2001.00007.x, Bertrand, M., Bombardini, M., Fisman, R. J., & Trebbi, F. (2018). In the DD model, treatment PMU is a continuous variable. Sometimes people just do not bother to think about it carefully because they satisfice (Simon, 1947). Uncertainty is pervasive in the business world. Since political markets in authoritarian regimes are quite different from those in democratic regimes (there is no lobbying expenditure or campaign contribution), we extend the political markets framework to include authoritarian regimes in the discussion and show the commonalities and differences of political markets in democracies and authoritarian regimes. Another reason why corporate philanthropy in China is especially political is that almost all charities in China are organized by the government (Zhang et al., 2016). Contrary to the intuition that marketization reduces the importance of ties and make transactions increasingly contractual (Peng, 2003), they find that as marketization level increase, the effect of political ties becomes even greater. Different interest groups often have conflicting interests. For instance, it is common for listed Chinese firms to have government officials on their boards of directors. ID 2779429). Therefore, we try 2011 and 2013 as alternative cutoff time points. For instance, Paik, Kang and Seamans (2018) investigate the determinants of Uber being banned in U.S. cities and find that the less political competition (measured by mayor tenure) there is in a city, the greater the likelihood of Uber being banned in the city. For instance, in many cities, the ridesharing company Uber fought to gain regulatory approval of operating in the cities. Additionally, our main model has an observation period of ten years (five years before and five years after). A high propensity of an executive collapse leads to slower growth and, conversely, whether low growth increases the propensity of a government change. Retrieved from https://papers.ssrn.com/abstract=2899403, Jia, N., Huang, K. G.-L., & Zhang, C. M. (2018). The campaign has generated a political earthquake in several provinces. Nonmarket Strategy Performance: Evidence from U.S. Electric Utilities. Institutions, institutional change, and economic performance. <> One important contribution of the political markets perspective is the notion of exchange, which becomes the foundation of corporate political strategy analysis. Firms contribute to local GDP growth. That is not to say that they are not sensitive to their welfare, but that they are often not fully aware of the consequences of candidate policies on their future welfare. Unlike product markets, however, rivalry on the demand side of political markets tend to make the supply of policies less efficient (Bonardi et al., 2005). Hence the power structure is highly asymmetric. exogenous) and there is little first-mover advantage, waiting is often a more desirable strategy. Lastly, we consider integrating the first and the second measure to create an integrated measure- the average rank of convicted officials. β3. (2017) use panel data to see how marketization progress affected the benefits of political embeddedness of firms in China. β1is the difference-in-difference estimate of the effect of political market uncertainty on corporate political investment. Retrieved from https://papers.ssrn.com/abstract=2779429, Haveman, H. A., Jia, N., Shi, J., & Wang, Y. In exchange, better policy treatments or greater accesses to resource are offered. This study contributes to the corporate political activity literature and the political markets literature. The Academy of Management Review, 20(1), 193–214. It is costly to conduct repeated surveys through multiple years to generate panel data. The campaign was launched soon after President Xi took office on November 15, 2012. We also include some variables that do not interfere causal inference to soak up residual variance. Panel data for multiple years are needed. For example, in the biotechnology R&D context, researchers often use the success rate of new drug invention in the drug category as a proxy for R&D uncertainty. how uncertainty affects both the level and the timing of R&D investment. https://doi.org/10.1080/07388940500339183. This may come to a head at the party’s elective national conference scheduled for December, at which it is supposed to elect a new leadership including President Jacob Zuma’s successor. *You can also browse our support articles here >, https://doi.org/10.1017/S0022381613001400, https://doi.org/10.1177/014920639101700108, https://doi.org/10.1111/j.1430-9134.2001.00007.x, https://doi.org/10.5465/AMJ.2006.23478676, https://doi.org/10.1080/07388940500339183, https://doi.org/10.1177/0951692890002004001, log(donations) if donations != 0; otherwise 0, No. No legitimate activists. The government remains the most influential player in the economy and a powerful stakeholder of firms. We deal with the problem by controlling for the number of NGOs in each province. Uncertainty avoidance is the level of stress that an organization, society or culture experiences when faced with uncertainty and ambiguity.This is commonly used to model the character of a nation or organization. It is particularly troubling when the treatment is serially correlated over time (in the worst case, it is “once on, always on”). Both formal and informal institutions may help mitigate the problem, but the problem cannot be entirely avoided. North, D. C. (1990a). Much more (tens of thousands) of lower level officials were indicated. Does Economic policy and political uncertainty effect stock market performance and firms’ investment. endobj 2017) or use survey data to study more refined questions. In addition, participants are boundedly rational and opportunistic. It finds that properties subject to political uncertainty are sold at a significant discount and that the discount is higher when people’s confidence declines and where residents feel more uncertain of the future. On the demand side, the number of interest groups who have power affecting policies is too small. Additionally, we discuss the rights exchanged and the types of political strategies, which are quite different from those used in democracies. %PDF-1.5 The number of groups (31) is large enough for a DD model to generate reliable causal inferences (Bertrand, Duflo and Mullainathan, 2002). Firm profitability and slack resources may affect the firm’s ability to invest in politics. One way is to keep the information of each year. Rather than being determined by ideologies of government elites or the “public interest,” policy outcomes are driven by competition between interest groups. The campaign not only affected the political world of China but also the corporate world. (2018). In the main model, the cutoff time point we use is 2012, at the end of which the anticorruption campaign was officially announced. The common good can only be obtained through consensus, and moral uncertainty directly supports this necessary function of the political process. Firms may also develop goodwill with the government by actively responding to government signals (Luo, Wang and Zhang 2017), participating in socially responsible practices (CSR) and making charitable donations (Zhang et al., 2016; Wang and Qian 2011). It targeted both “tigers and flies” – that is, both high-level “corrupt” officials and low-level “corrupt” officials. https://doi.org/10.2307/20159126, Bonardi, J.-P., Holburn, G. L. F., & Bergh, R. G. V. (2006). We include control variables to account for possible selection into treatment. National Bureau of Economic Research. That is, observations (the firms) receive different dosages of treatment. Regional characteristics are obtained from the National Bureau of Statistics of China (NBSC). For instance, provinces with higher PMU might have lower GDP per capita. Organization Science, 25(1), 127–148. Dickson, B. J. Political uncertainty has become prominent not only in Europe but also in the United States. There is no clear-cut measure. Government official board member. Others have modeled the effects of political uncertainty in a macroeconomic context. We utilize this exogenous shock to identify the effects of increased political uncertainty on corporate political investments. https://doi.org/10.1002/smj.2152, Clarke, K. A. They find that both corrupt practices and political connection affect the likelihood of a firm being investigated. The other is to collapse time into two periods: before 2012 (including 2012) and after 2012. To test our prediction, we use an unconventional proxy for corporate political investment: corporate charitable donations. Compared to the investments that are purely aimed to generate political influence, investments that serve multiple purposes are likely to be affected less by sudden changes in conditions of political markets.
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