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Does U.S. CEO connectedness in China matter? Evidence from Chinese import penetration

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Abstract

I study whether U.S. CEOs well connected in China better capture investment opportunities from China. I find that Chinese connected CEOs realize larger sales from China, better announcement returns of investments in China, greater operating performance, and more rewards in the labor market when investment opportunities from China increase, especially for CEOs’ connections with political officers in China. These relations are stronger for firms that lack relevant information about Chinese environment in the boardroom. My results are robust to various controls for managerial skill and regulatory reforms in China as well as tests for endogeneity.

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Notes

  1. Studies have investigated negative impacts from import penetration such as increased unemployment rate, reduced participation of labor force, lower wages (Autor et al. 2013), higher substantial labor adjustment costs (Autor et al. 2014), sluggish employment growth (Acemoglu et al. 2016a, b), and lower innovation, sales, and R&D expenditure (Autor et al. 2016a, b).

  2. Why is China special? How about Brazil, Indonesia, and Russia, which are also considered most favored nations? These three emerging countries each specialize in one specific commodity—namely, iron ore, rubber, and oil and gas, respectively. By contrast, China’s comparative advantage is industrial goods, developed during the Mao and Deng eras (Autor et al. 2016a, b).

  3. Chen et al. (2020) find that U.S. firms demand more China-related directors, and China-related directors facilitate the firm’s investments in China. Hombert and Matray (2018) find that firms with many R&D stocks can alleviate the negative effects of competition from China.

  4. See https://en.wikipedia.org/wiki/Guanxi.

  5. The literature suggests that CEO traits play an important role in the firms they run (e.g., Bertrand and Schoar 2003; Custódio and Metzger 2013).

  6. The role of CEOs’ personal China-related social connections could be particularly important when CEOs in U.S. firms do not have China-related work experience. In my sample, there are only 10 CEOs who have China-related work experience.

  7. Confucianism, also known as Ruism, is described as tradition, a philosophy, a religion, a humanistic or rationalistic religion, a way of governing, or simply a way of life. See https://en.wikipedia.org/wiki/Confucianism.

  8. Benjamin Carlson, “Why Big American Businesses Fail in China?” CNBC News, September 26, 2013 (see https://www.cnbc.com/2013/09/26/why-big-american-businesses-fail-in-china.html).

  9. The holdup problem is a situation where two parties may be able to work most efficiently by cooperating but refrain from doing so because of concerns that they may give the other party increased bargaining power and thereby reduce their own profits. When party A has made a prior commitment to a relationship with party B, the latter can “hold up” the former for the value of that commitment. The holdup problem leads to severe economic cost and might also lead to underinvestment. See https://en.wikipedia.org/wiki/Hold-up_problem.

  10. Google shut down its Chinese search engine in 2010 because the company found that the Gmail accounts of a number of Chinese human rights activists had been hacked, and decided to no longer conform to the Chinese government’s censorship policies.

  11. For more detailed information on data policy of BoardEx database, see Fracassi and Tate (2012) and Engelberg et al. (2013).

  12. I obtain import value of the United States from China from the United Nations Commodity Trade Statistics Database (UN Comtrade), and I thank David Dorn for providing the crosswalk file for the concord of six-digit HS product-level trade data from UN Comtrade to four-digit SIC manufacturing industries at http://www.ddorn.net/data.htm.

  13. The conclusion remains unchanged if I replace domestic absorption in 1991 with 2001, the year of the accession to WTO for China.

  14. Specifically, I control forCEO age, CEO tenure, network size, degree of centrality, firm size, market-to-book ratio, leverage, free cash flow, foreign sales ratio, and indicators for strong U.S. dollar (currency strength), M&A deals, and JV deals.

  15. In nonlinear logit or probit model, high-dimension fixed effects cannot work well because the maximum likelihood estimators are inconsistent with firm fixed effects due to the incidental parameter problem (Guo and Masulis 2015).

  16. The results based on industry-by-year fixed effects are not tabulated and are available upon request.

  17. This study is less likely to suffer from reversed causality problem since most of the social ties of CEOs in China have been formed prior to current position for years. Please see detail discussion in Ferris et al. (2017).

  18. As of 2015, Chinese Singaporeans constitute 76.18% of Singapore’s citizens (see “Population in Brief 2015” at http://www.nptd.gov.sg/Portals/0/Homepage/Highlights/population-in-brief-2015.pdf).

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Acknowledgements

This paper is a modified version of my PhD dissertation. I am grateful for suggestions and comments from two anonymous referees, Chin-Wen Hsin, Po-Hsuan Hsu, Shing-yang Hu, Wei-Hsien Li, Woan-Lih Liang, Jiang Luo, David Reeb, Johan Sulaeman, Yanzhi Wang, and my dissertation committee: I-Ju Chen, Sheng-Syan Chen, Yan-Shing Chen, Keng-Yu Ho, Chia-Wei Huang, and Chih-Yen Lin. I also thank seminar participants at National Central University.

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  1. Department of Finance, National Central University, Jung-da Rd, Jung-li City, Taoyuan, Taiwan

    Shu-Cing Peng

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Appendix

Appendix

1.1 Variable definitions

See Table 13.

Table 13 This appendix provides detailed descriptions of all the variables used in the tables
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Peng, SC. Does U.S. CEO connectedness in China matter? Evidence from Chinese import penetration. Rev Quant Finan Acc 59, 1051–1094 (2022). https://doi.org/10.1007/s11156-022-01070-y

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