Skip to main content
SpringerLink
Log in

Executive power and politically connected independent directors: evidence from China

  • Original Article
  • Published:
Asian Business & Management Aims and scope Submit manuscript

Abstract

Political connections have been shown to be important for firms’ survival and growth particularly in emerging economies, but our understanding of its determinants is rather limited. Drawing upon managerial power theory, we posit that executive power will be negatively associated with the percentage of politically connected independent directors (PCIDs) among all independent directors, and this effect will hold for independent directors with government background, but not for those with legislative background. In addition, we argue that state ownership will weaken the impact of executive power on the concentration of PCIDs. Using a sample of 2424 Chinese listed firms from 2004 to 2014 we find strong support for our hypotheses. Our study is the first to theoretically explain and empirically show that executive power will impact the formation of firms’ political connections.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

References

  • Aguilera, R. V., Desender, K., Bednar, M. K., & Lee, J. H. (2015). Connecting the dots: Bringing external corporate governance into the corporate governance puzzle. Academy of Management Annals, 9(1), 483–573.

    Google Scholar 

  • Arnoldi, J., & Muratova, Y. (2019). Unrelated acquisitions in China: The roel of political ownership and political connections. Asia Pacific Journal of Management, 36(1), 113–134.

    Google Scholar 

  • Bathala, C. T., & Rao, R. P. (1995). The determinants of board composition: An agency theory perspective. Managerial and Decision Economics, 16, 59–69.

    Google Scholar 

  • Bebchuk, L. A., Cremers, K. M., & Peyer, U. C. (2011). The CEO pay slice. Journal of Financial Economics, 102(1), 199–221.

    Google Scholar 

  • Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem. The Journal of Economic Perspectives, 17(3), 71–92.

    Google Scholar 

  • Boeker, W. (1992). Power and managerial dismissal: Scapegoating at the top. Administrative Science Quarterly, 37(3), 400–421.

    Google Scholar 

  • Boycko, M., Shleifer, A., & Vishny, R. W. (1996). A theory of privatisation. The Economic Journal, 106(435), 309–319.

    Google Scholar 

  • Cannella, A. A., & Lubatkin, M. (1993). Succession as a sociopolitical process: Internal impediments to outsider selection. Academy of Management Journal, 36(4), 763–793.

    Google Scholar 

  • Chen, L. (2013). Nearly half of the independent directors had government working background. China Youth Daily.

  • Chen, X., Xie, E., & Van Essen, M. (2019). Performance feedback and firms’ R&D frequency: A comparison between state-owned and private-owned enterprises in China. Asian Business & Management. https://doi.org/10.1057/s41291-019-00092-0.

    Article  Google Scholar 

  • Cheng, L. (2018). Estimating the value of political connections in China: Evidence from sudden deaths of politically connected independent directors. Journal of Comparative Economics, 46, 495–514.

    Google Scholar 

  • Chizema, A., Liu, X., Lu, J., & Gao, L. (2015). Politically connected boards and top executive pay in Chinese listed firms. Strategic Management Journal, 36(6), 890–906.

    Google Scholar 

  • Claessens, S., Djankov, S., & Lang, L. H. (2000). The separation of ownership and control in East Asian corporations. Journal of Financial Economics, 58(1), 81–112.

    Google Scholar 

  • Daily, C. M., & Johnson, J. L. (1997). Sources of CEO power and firm financial performance: A longitudinal assessment. Journal of Management, 23(2), 97–117.

    Google Scholar 

  • Denis, D. J., Denis, D. K., & Sarin, A. (1997). Ownership structure and top executive turnover. Journal of Financial Economics, 45(2), 193–221.

    Google Scholar 

  • Desender, K. A., Aguilera, R. V., Crespi, R., & García-Cestona, M. (2013). When does ownership matter? Board characteristics and behavior. Strategic Management Journal, 34(7), 823–842.

    Google Scholar 

  • Du, J., Lu, Y., & Tao, Z. (2015). Government expropriation and Chinese-style firm diversification. Journal of Comparative Economics, 43(1), 155–169.

    Google Scholar 

  • Eminet, A., & Guedri, Z. (2010). The role of nominating committees and director reputation in shaping the labor market for directors: An empirical assessment. Corporate Governance: An International Review, 18(6), 557–574.

    Google Scholar 

  • Feng, T., & Wang, G. (2009). How private enterprises establish organizational legitimacy in China’s transitional economy. Journal of Management Development, 29(4), 377–393.

    Google Scholar 

  • Finkelstein, S. (1992). Power in top management teams: Dimensions, measurement, and validation. Academy of Management Journal, 35(3), 505–538.

    Google Scholar 

  • Fralich, R., & Fan, H. (2018). Legislative political connections and CEO compensation in China. Asian Business & Management, 17(2), 112–139.

    Google Scholar 

  • Fredrickson, J. W., Hambrick, D. C., & Baumrin, S. (1988). A model of CEO dismissal. Academy of Management Review, 13(2), 255–270.

    Google Scholar 

  • Goldman, E., Rocholl, J., & So, J. (2013). Politically connected boards of directors and the allocation of procurement contracts. Review of Finance, 17(5), 1617–1648.

    Google Scholar 

  • Granger, C. W. (1969). Investigating causal relations by econometric models and cross-spectral methods. Econometrica Journal of the Econometric Society, 37(3), 424–438.

    Google Scholar 

  • Greene, W. (2004). Fixed effects and bias due to the incidental parameters problem in the Tobit model. Econometric Reviews, 23(2), 125–147.

    Google Scholar 

  • Greve, H. R., & Zhang, C. M. (2017). Institutional logics and power sources: Merger and acquisition decisions. Academy of Management Journal, 60(2), 671–694.

    Google Scholar 

  • Haveman, H. A., Jia, N., Shi, J., & Wang, Y. (2017). The dynamics of political embeddedness in China. Administrative Science Quarterly, 62(1), 67–104.

    Google Scholar 

  • Haynes, K. T., & Hillman, A. (2010). The effect of board capital and CEO power on strategic change. Strategic Management Journal, 31(11), 1145–1163.

    Google Scholar 

  • He, X., Chakrabarty, S., & Eden, L. (1998). The global emergence of Chinese multinationals: A resource-based view of ownership and performance. Asian Business & Management, 15, 1–31.

    Google Scholar 

  • Hillman, A. J. (2005). Politicians on the board of directors: Do connections affect the bottom line? Journal of Management, 31(3), 464–481.

    Google Scholar 

  • Hermalin, B. E., & Weisbach, M. S. (1998). Endogenously chosen boards of directors and their monitoring of the CEO. American Economic Review, 88(1), 96–118.

    Google Scholar 

  • Hillman, A. J., & Dalziel, T. (2003). Boards of directors and firm performance: Integrating agency and resource dependence perspectives. Academy of Management Review, 28(3), 383–396.

    Google Scholar 

  • Houston, J. F., Jiang, L., Lin, C., & Ma, Y. (2014). Political connections and the cost of bank loans. Journal of Accounting Research, 52(1), 193–243.

    Google Scholar 

  • Jia, N. (2014). Are collective political actions and private political actions substitutes or complements? Empirical evidence from China’s private sector. Strategic Management Journal, 35(2), 292–315.

    Google Scholar 

  • Krause, R., Priem, R., & Love, L. (2015). Who’s in charge here? Co-CEOs, power gaps, and firm performance. Strategic Management Journal, 36(13), 2099–2110.

    Google Scholar 

  • Lehn, K. M., & Zhao, M. (2006). CEO turnover after acquisitions: Are bad bidders fired? The Journal of Finance, 61(4), 1759–1811.

    Google Scholar 

  • Li, H., Meng, L., Wang, Q., & Zhou, L. A. (2008). Political connections, financing and firm performance: Evidence from Chinese private firms. Journal of Development Economics, 87(1), 283–299.

    Google Scholar 

  • Li, H., & Zhang, Y. (2007). The role of managers’ political networking and functional experience in new venture performance: Evidence from China’s transition economy. Strategic Management Journal, 28, 791–804.

    Google Scholar 

  • Li, X., & Liang, X. (2015). A Confucian social model of political appointments among Chinese private-entrepreneurs. Academy of Management Journal, 58(2), 592–617.

    Google Scholar 

  • Liu, W. X., Jiang, L., Kang, Y., & Wang, F. (2010). Why China railway construction corporation lost money on the Mecca Light Railway. Economic Observer.

  • Liu, F., Lin, H., & Wu, H. (2018). Political connections and firm value in China: An event study. Journal of Business Ethics, 152(2), 551–571.

    Google Scholar 

  • Lu, H., Pan, H., & Zhang, C. (2015). Political connectedness and court outcomes: Evidence from Chinese corporate lawsuits. The Journal of Law and Economics, 58(4), 829–861.

    Google Scholar 

  • Ma, D., & Parish, W. (2006). Tocquevillian moments: Charitable contributions by Chinese private entrepreneurs. Social Forces, 85(2), 943–964.

    Google Scholar 

  • Ma, J., & Khanna, T. (2016). Independent directors’ dissent on boards: Evidence from listed companies in China. Strategic Management Journal, 37(8), 1547–1557.

    Google Scholar 

  • Marquis, C., & Qian, C. (2014). Stakeholder legitimacy and corporate social responsibility reporting in China. Organization Science, 25(1), 127–148.

    Google Scholar 

  • Marquis, C., & Raynard, M. (2015). Institutional strategies in emerging markets. The Academy of Management Annals, 9(1), 291–335.

    Google Scholar 

  • Muratova, Y., Arnoldi, J., Chen, X., & Scholderer, J. (2018). Political rotations and cross-province firm acquisitions in China. Asian Business & Management, 17(1), 37–58.

    Google Scholar 

  • Noh, G., & Shin, D. (2018). The different influences of the government and politicians on the international expansion of Chinese firms. Asian Business & Management, 17, 366–396.

    Google Scholar 

  • O’Connor, J. P., Priem, R. L., Coombs, J. E., & Gilley, K. M. (2006). Do CEO stock options prevent or promote fraudulent financial reporting? Academy of Management Journal, 49(3), 483–500.

    Google Scholar 

  • Palvia, A., Vahamaa, E., & Vahamaa, S. (2015). Are female CEOs and chairwomen more conservative and risk averse? Evidence from the banking industry during the financial crisis. Journal of Business Ethics, 131(3), 577–594.

    Google Scholar 

  • Peng, M. W., Li, Y., Xie, E., & Su, Z. (2010). CEO duality, organizational slack, and firm performance in China. Asia Pacific Journal of Management, 27(4), 611–624.

    Google Scholar 

  • Peng, M. W., & Luo, Y. (2000). Managerial ties and firm performance in a transition economy: The nature of a micro-macro link. Academy of Management Journal, 43, 486–501.

    Google Scholar 

  • Pi, L., & Lowe, J. (2011). Can a powerful CEO avoid involuntary replacement? An empirical study from China. Asia Pacific Journal of Management, 28(4), 775–805.

    Google Scholar 

  • Ruigrok, W., Peck, S., Tacheva, S., Greve, P., & Hu, Y. (2006). The determinants and effects of board nomination committees. Journal of Management and Governance, 10(2), 119–148.

    Google Scholar 

  • Shi, H., Xu, H., & Zhang, X. (2018). Do politically connected independent directors create or destroy value? Journal of Business Research, 83, 82–96.

    Google Scholar 

  • Shin, T., & You, J. (2017). Pay for talk: How the use of shareholder-value language affects CEO compensation. Journal of Management Studies, 54(1), 88–117.

    Google Scholar 

  • Shivdasani, A., & Yermack, D. (1999). CEO involvement in the selection of new board members: An empirical analysis. The Journal of Finance, 54(5), 1829–1853.

    Google Scholar 

  • Shleifer, A. (1998). State versus private ownership. The Journal of Economic Perspectives, 12(4), 133–150.

    Google Scholar 

  • Sun, P., Hu, H. W., & Hillman, A. J. (2016). The dark side of board political capital: Enabling blockholder rent appropriation. Academy of Management Journal, 59(5), 1801–1822.

    Google Scholar 

  • Sun, P., Mellahi, K., & Thun, E. (2010). The dynamic value of MNE political embeddedness: The case of the Chinese automobile industry. Journal of International Business Studies, 41, 1161–1182.

    Google Scholar 

  • Thornton, P. H., & Ocasio, W. (2008). Institutional logics. In R. Greenwood, C. Oliver, K. Sahlin-Andersson, & R. Suddaby (Eds.), Sage handbook of organizational institutionalism (pp. 99–129). London: Sage.

    Google Scholar 

  • Ting, H. I. (2013). CEO turnover and shareholder wealth: Evidence from CEO power in Taiwan. Journal of Business Research, 66(12), 2466–2472.

    Google Scholar 

  • Wang, L. (2015). Protection or expropriation: Politically connected independent directors in China. Journal of Banking & Finance, 55, 92–106.

    Google Scholar 

  • Wang, D. D., Du, F., & Marquis, C. (2019). Defending Mao’s dream: How politicians’ ideological imprinting affects firm’ political appointment in China. Academy of Management Journal, 62(4), 1111–1136.

    Google Scholar 

  • Wei, W., Tang, R. W., & Yang, J. Y. (2018). Independent directors in Asian firms: An integrative review and future directions. Asia Pacific Journal of Management, 35(3), 671–696.

    Google Scholar 

  • Westphal, J. D., & Stern, I. (2006). The other pathway to the boardroom: Interpersonal influence behavior as a substitute for elite credentials and majority status in obtaining board appointments. Administrative Science Quarterly, 51(2), 169–204.

    Google Scholar 

  • Westphal, J. D., & Zajac, E. J. (1995). Who shall govern? CEO/board power, demographic similarity, and new director selection. Administrative Science Quarterly, 40(1), 60–83.

    Google Scholar 

  • Xu, Y. (2018). Anticorruption regulation and firm value: Evidence from a shock of mandated resignation of directors in China. Journal of Banking & Finance, 92, 67–80.

    Google Scholar 

  • Xu, G., & Yano, G. (2016). How does anti-corruption affect corporate innovation? Evidence from recent anti-corruption efforts in China. Journal of Comparative Economics, 45(3), 498–519.

    Google Scholar 

  • Xu, E., & Zhang, H. (2008). The impact of state shares on corporate innovation strategy and performance in China. Asia Pacific Journal of Management, 25(3), 473–487.

    Google Scholar 

  • Zald, M. N. (1969). The power and functions of boards of directors: A theoretical synthesis. American Journal of Sociology, 75(1), 97–111.

    Google Scholar 

  • Zhang, J., Marquis, C., & Qiao, K. (2016). Do political connections buffer firms from or bind firms to the government? A study of corporate charitable donations of Chinese firms. Organization Science, 27(5), 1307–1324.

    Google Scholar 

  • Zhao, J. (2010). Ownership structure and corporate diversification strategies of Chinese business groups. Management Research Review, 33(12), 1101–1112.

    Google Scholar 

  • Zhou, K. Z., Tse, D. K., & Li, J. J. (2006). Organizational changes in emerging economies: Drivers and consequences. Journal of International Business Studies, 37(2), 248–263.

    Google Scholar 

  • Zhu, D. H., & Westphal, J. D. (2014). How directors’ prior experience with other demographically similar CEOs affects their appointments onto corporate boards and the consequences for CEO compensation. Academy of Management Journal, 57(3), 791–813.

    Google Scholar 

  • Zhu, H., & Yoshikawa, T. (2016). Contingent value of director identification: The role of government directors in monitoring and resource provision in an emerging economy. Strategic Management Journal, 37(8), 1787–1807.

    Google Scholar 

Download references

Acknowledgements

The authors are grateful to associate editor Asli Colpan, two anonymous reviewers, and Jakob Arnoldi for their helpful comments. Wei acknowledges the financial support from the Fundamental Research Funds for Central Universities (Grant No. 2019JBM403).

Author information

Authors and Affiliations

  1. School of Economics and Management, Beijing Jiaotong University, Room 924, Science Building, Haidian District, Beijing, 100044, China

    Wei Wei

  2. Department of Management, Aarhus University, M336, 4 Fuglesans Allé, 8210, Aarhus, Denmark

    Yulia Muratova

Authors
  1. Wei Wei
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Yulia Muratova
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Wei Wei.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Wei, W., Muratova, Y. Executive power and politically connected independent directors: evidence from China. Asian Bus Manage 21, 1–24 (2022). https://doi.org/10.1057/s41291-020-00104-4

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/s41291-020-00104-4

Keywords

Search

Navigation