Political Party and Firm Value, Evidence from Political Control Shift in SOEs

Abstract

An important reform of state-owned enterprises (SOEs) in China stipulates that all SOEs must shift control of the board or corporate decision making from the administrative agencies to the party. We exploit this reform and study how firm value is affected due to the significant shift in corporate power. The event-study analysis shows that stock price experiences significant abnormal losses for SOEs listed on both A-share and Hong Kong stock exchanges. However, sound governance practices such as auditor quality, board independence, shareholder protection structure and transparent accounting disclosure standards help mitigate the deadweight loss in the market value caused by the heightened political control of firms.