This dissertation contains two related empirical essays on political connections in China, using evidence on the land market as a case study. The first essay examines whether the politically connected firms obtain economic rents based on their connections, and their consequences both at the firm level and for the land market as a whole, whereas the second essay examines whether these bureaucrats-directors shared part of the rents.

In the first essay, I employ a data set that contains land transactions conducted between the publicly listed firms and local governments in China for the period 2000-2012, and find that the politically connected firms had been able to obtain economic rents of an average magnitude of 16% from the local governments with which they have developed ties....[ Read more ]

This dissertation contains two related empirical essays on political connections in China, using evidence on the land market as a case study. The first essay examines whether the politically connected firms obtain economic rents based on their connections, and their consequences both at the firm level and for the land market as a whole, whereas the second essay examines whether these bureaucrats-directors shared part of the rents.

In the first essay, I employ a data set that contains land transactions conducted between the publicly listed firms and local governments in China for the period 2000-2012, and find that the politically connected firms had been able to obtain economic rents of an average magnitude of 16% from the local governments with which they have developed ties. By drawing a distinction between general political ties, which we define as firms having hired former senior officials from just anywhere in the country, and local connections, referred to those firms having hired the former officials from precisely the same municipalities in which they held positions and bought land, we rule out the possibility that managerial ability or local knowledge is the channel through which the discount associated with political connections emanate. Furthermore, by showing that the rents obtained from political connections are larger for: 1) land designated for real estate development, 2) when land was sold using a less transparent method, and 3) in regions where the size of the government bureaucracy is larger, we prove that the channel by which economic rents are created is due to rents seeking. Conversely (but consistently), the size of rents diminish noticeably in times of anti-corruption campaigns. Last but not least, while firms that paid a lower price for land has a higher market value, the discount has no effect on either the firm’s revenue or productivity. Overall, we find that evidence of political connections in China’s land market is associated with significantly greater government intervention in the land market.

In my second essay, I examine the question of whether the former government and/or party officials benefited from being directors of the listed firms in which they subsequently serve. Using a different data set, I find that, while these former bureaucrats do receive compensations higher than their peers without prior bureaucratic experience, this premium is actually attributed to the “connecting role” they helpfully assumed in the land transactions, rather than based on the firm’s overall performance—metrics upon which compensations made to their non-official directors are based. Specifically, firms with directors who are formerly bureaucrats serving in the same municipality from which they purchased land paid an average of 17% less on land price, from which about 1%—equivalent to about 0.5 million yuan per deal—is paid to them as bonus. The “broker” directors also profit from trading firm’s stock before and after the land transaction. Consistent with the previous findings, this one similarly suggests that the financial returns to the bureaucrats-directors is the result of rents seeking.