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| Policy Uncertainty,Market Competition and Allocation of Capital: Evidence from Turnover of City-level Leaders |
| CHEN Deqiu, CHEN Yunsen, DONG Zhiyong
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| School of International Business,University of International Business and Economics;School of Accountancy,Central University of Finance and Economics/China Management Accounting Research and Development Center;School of Economics,Peking University |
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Abstract Based on political power transformation channel, this paper empirically tests the influence of policy uncertainty caused by core official turnover to firms’ capital investment. Results find that, the policy uncertainty because of turnover of city-level leaders would decrease firms’ investment efficiency, and this influence is more pronounced when firms are in regions that faced with strong government intervention or political connection. Furthermore, when there is a non-regular turnover or the successor comes from other cities, firms’ investment efficiency is more affected. Additional tests show that one influence channel is the policy uncertainty increase firm’s stock market price co-movement, which further decrease the information content of stocks. The economic consequence of the policy uncertainty is, firms are prone to decrease their investments and drop those projects with positive NPV, which causes the worse performance. Our evidences add to the “policy uncertainty and corporate finance” literature.
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Published: 10 January 2018
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