Bureaucrats as Successor CEOs

Chinese companies sometimes appoint a government official (bureaucrat) as CEO on the expectation of benefiting from the political connections of the new hire. Based on a sample of 2,454 CEO transitions our empirical findings are consistent with the implications of a simple contract model in oligopolistic markets. Firms that appoint a bureaucrat as CEO obtain more credit and subsidies. They have positive abnormal announcement returns, negative abnormal long-run returns and larger variance of long-run returns. Furthermore, they experience a deterioration in operating performances, increased rent-seeking behavior of the management and weakening of corporate governance. The results from the split share structure reform in 2005 corroborate the supportive findings for the preferential treatment hypothesis.