Research On The Microeconomic Consequences Of Connections Between Local Government Official

With the rise of social network in financial and accounting research,the connection between enterprises and the government,enterprises and market intermediaries,and two enterprises has received a lot of attention.This article focuses on the impact of connections between local government officials on local companies.This issue has important academic significance for the following reasons: First of all,a large number of economic development cases show that the relationship between higher-level officials and lower-level officials affects the implementation of economic policies,and the relevant academic literature also verifies that the connection between officials can effectively reduce the principal-agent problem in hierarchical government(Jiang,2018).Secondly,the relationship between officials also affects the formulation of local economic policies.Many policies such as household contracting of production in China are first proposed and tested by local governments and then promoted nationwide.Because these pilot policies often had some unconventional colors when first proposed,the support and protection of higher-level government officials to connected lower-level officials is very important to ensure the smooth development and promotion of the "pilot".Finally,the consequences of connections between local companies and specific officials may not only be limited to the official himself,but also affected by the social network of the official.Therefore,the connection between local government officials is closely related to the behavior of local enterprises.This article attempts to find more evidence to understand its economic results and its path.How the connections between local government officials affect corporate behavior is a topic of intense research.On the one hand,the connection between officials can help alleviate the short-sighted behaviors of lower-level officials,and the protection outside the system is also more conducive to related officials to carry out more institutional innovations and seek long-term economic growth points(Jiang,2018),and provide good surroundings for the long-term operations of local enterprises.On the other hand,as an informal relationship between officials,the connection between officials may lead to corruption and rent-seeking activities(Weingrod,1968),reduce the efficiency of public office arrangements(Xu et al.,2018),and shake political stability(Wantchekon,2003).These negative consequences are undoubtedly detrimental to the operation of local enterprises,and will increase the motivation of enterprises to seek rent and occupy more production resources.Therefore,the impact of connections between local government officials on companies is an empirical question worth testing.This paper takes the Shanghai and Shenzhen A-share listed companies from2009 to 2018 as a research sample to empirically examine how the alumni connection between provincial officials and municipal officials affects the value of local enterprises.Furtherly,this paper focus on the innovation strategy and diversification strategy to explore the specific source of the corporate value changes.Finally,this paper analyzes the path of how the alumni connection between officials affect corporate performance and strategic choice from the perspective of government talent selection and corporate subsidiary investment.The main findings and conclusions of this paper are as follows:(1)When there are alumni connections between local municipal officials and provincial officials,the value of local companies is significantly higher.Furthermore,the above results are more significant in private enterprises,companies located in regions with higher levels of marketization,and companies with lower short-term performance pressure.(2)When there are alumni connections between local municipal officials and provincial officials,local companies have higher participation in innovation and greater investment in innovation.Furthermore,the above results are more significant in private enterprises,companies located in regions with higher levels of marketization,and companies faced with less financial constraints.(3)When there are alumni connections between local municipal officials and provincial officials,the diversification level of local companies is lower and the diversification performance is improved.Furthermore,the above results are more significant in private enterprises,companies located in regions with higher levels of marketization,and with lower agency costs.(4)The path test of the government administrative talent selection mechanism shows that the connected municipal officials have more cross-province work experience,and the more the provinces municipal officials have worked in,the higher the value of the local companies,the higher the degree of local companies’ participation in innovation,the greater the amount of innovation investment.The path test of subsidiary investment shows that the alumni connection between officials can significantly improve the performance of local subsidiaries.This paper mainly has the following academic contributions and practical value:(1)This paper provides micro-level evidence for the economic consequences of connections between local government officials.The influence of connections among local government officials on promotion and the macroeconomic development has always been a hot research topic in the field of political economy.The literature shows that the connection with central officials is an important factor of promotion(Opper and Brehm,2007;Shih et al.,2012;Jia et al.,2015;Landry et al.,2018),can affect the allocation of credit and financial resources(Shih,2004;Lu et al.,2011)and regional economic growth(Jiang et al.,2018),but there should be a microeconomic basis for macroeconomic theory(Yi and Lin,2003).However,the above research does not provide evidence at the micro level.The research on the influence of alumni connections between provincial and municipal officials on the performance and strategic choices of local companies will help to improve the logical chain of the connection between local government officials and macroeconomic growth from a micro perspective.(2)This paper has enriched the literature on social network.In recent years,social networks is a hot topic in financial and accounting research.The existing research mainly examines the direct impact of social networks on the connected parties,such as the resource effect or information effect of political connection(Yu and Pan,2008;Yu et al.,2010;Li and Xu,2013),the impact of the personal relationship between analysts or auditors and the executives of companies on the accuracy of earnings forecasts or audit quality(Guan et al.,2016;He et al.,2017;Cohen et al,2020;Tang and Chen,2017).However,the externality of social networks is neglected.Only Li et al.(2020)studied how the networks between audited clients affects the audit adjustments.On the one hand,the mutual communication between connected audited clients will weaken the auditor’s negotiation power and reduce audit quality.On the other hand,the social network between clients strengthens the importance of the auditor’s reputation,and the auditor will therefore improve the audit quality.This shows that the influence of the social network may not be limited to the two connected parties,interested third parties will adjust decisions when they expect the possible consequences of social network.Although local governments in our country cannot directly participate in the operations of local enterprises,their control of land resources,administrative approvals,bank credits and other scarce resources essential to the survival and development of enterprises will inevitably be important to the production and operation of local enterprises.Therefore,the political environment must be an important consideration when companies formulate strategies.This paper shows that when municipal and provincial officials are connected,local companies are more inclined to choose a long-term business strategy.(3)This paper enriches the literature on the influence of institutional factors on the corporate innovation strategy.Existing research on institutional factors affecting corporate innovation activities mostly focus on macroeconomic legal systems(Ayyagari et al.,2011;Fang et al.,2017;Wu and Tang,2016),government policies(Li and Zheng,2016;Yu et al.,2016;Howell,2017)and other formal systems.Government officials as the main players of government activities,their personal interests will inevitably affect the policy orientation of local governments,and the long-term nature of innovative activities is essentially contradictory to the short-term economic growth pursued by officials What kind of system design can make the interests of officials compatible with enterprise innovation as much as possible? This paper shows that in the economic transition period,the connection between local government officials as an informal system can provide tolerance of failure for high-risk innovative activities,and encourage local enterprises to increase investment in innovation.(4)This paper enriches the literature on the influence of institutional factors on the corporate diversification strategy.Unlike Western theoretical literature explaining the motivation diversification from the perspectives of resources,transaction costs and agency problem,government policies and institutional factors are more relevant to the diversification strategy of Chinese enterprises.Empirical evidence also shows that the intervention of local officials can lead to inefficient diversification of local enterprises(Chen and Huang,2007;Ma and Liu,2010).This paper shows that the connection between local government officials can help reduce the external market uncertainty and the government’s renting behavior,thereby reducing the ineffective diversification of enterprises.(5)This paper enriches the relevant research on the behavior of municipal government officials.Existing research on local government behavior and its economic consequences is mainly concentrated at the provincial level,while research on municipal officials is relatively rare.However,the decentralization reform has greatly strengthened the role of municipal governments in local economic development.Differences in power and functions led to differences in the motivations and behaviors of governments at all levels.Xia and Fang(2005)and Cheung et al.(2008)believe that higher-level governments are more likely to restrain their own behavior and pay attention to their own image.Compared with the central government and provincial-level governments,municipal and county-level governments have more interference and value damage to enterprises in their jurisdictions.Therefore,how to restrain the behavior of low-level governments is more important.The paper shows that the alumni association with provincial officials can help alleviate the agency problem between provincial and municipal governments,and enhance the long-term value and long-term strategic choice of local enterprises.This paper shows that the connections between local government officials can benefit the long-term growth of local companies.It is worth noting that this paper does not promote the informal relationship in the administrative system,but emphasizes that the embedding of certain informal relationships can bring certain benefits when the current formal system is not perfect.We find that the positive effect of the connection between officials only significant in regions with higher-level marketization and when the corporate governance is good,indicating that the positive effect of the connection between officials requires a certain supporting environment.