The Politics of Corporate Investment: Evidence from Political Turnovers and IPO Proceeds

Abstract

Using project-level data on changes in firms’ investments of IPO proceeds around deaths, term limits, and mandatory retirements of local politicians, this paper studies corporate investment as a novel channel of political activity. Following exogenous turnovers of provincial governors in China, local firms initiate new projects and cancel/modify existing projects to cater to incoming politicians. Subsequently, they obtain better access to bank credit, higher government subsidies, lower effective tax rates, and better performance. Furthermore, their top managers are more likely to be elected to political office. These effects are followed by increases in local fiscal deficits.