Political control and performance in China's listed firms

The performance implications of the involvement of grassroots local party committees of the Chinese Communist Party (CCP) in the decision making of China's listed firms are investigated. First, we show that the decision-making power of local party committees relative to the power of the largest shareholders is associated positively with firm performance. This result suggests that party control restrains the largest shareholders from expropriation but that the existing level of party control is insufficient to control the largest shareholders. Second, we show that the decision-making power of local party committees relative to managers is associated negatively with firm performance. This result suggests that the political costs associated with party control over managers are more detrimental to firm performance than are agency problems and that the existing level of party control over managers is excessive. On balance, our results indicate that the existing level of party control is excessive and that reducing the decision-making power of local party committees would improve the performance of China's listed firms. Journal of Comparative Economics 32 (4) (2004) 617-636. Faculty of Business and Economics, (C) 2004 Association for Comparative Economic Studies. Published by Elsevier Inc. All rights reserved.