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Political uncertainty and corporate working capital in China

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Abstract

We examine how turnovers of provincial officials in China correspond to changes in corporate working capital. We find that during periods of turnover in government, working capital tends to increase as cash and long-term investments decrease, while total assets remain stable. Firms increase their working capital more for promotion of government officials. In addition, a firm obtains more short-term debts from banks and may be more willing to provide trade credit to its customers during political uncertainty period. We find that government policy uncertainty and intervention uncertainty factors coexist and interact with firms’ working capital during periods of provincial officials’ turnover in China.

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Notes

  1. According to the government cadre (ganbu) system and the “People’s Republic of China Civil Law” (2005), the ranks of government cadres are leveled at the national level, the deputy national level, the provincial or central bureau chief level, the deputy provincial or deputy central bureau chief level, etc. Although both are at the level of a provincial or central bureau chief, a provincial CCP secretary ranks higher than a provincial governor.

  2. Trading securities are investments in debt or equity that management plans to actively trade for profit in the current period. In other words, trading securities are stocks or bonds that management plans to purchase and sell in order to make money in the short term.

  3. China’s meteoric rise over the past half-century is one of the most striking examples of the impact of opening up an economy to global markets. The average growth rate of real GDP was 6–8% between 1999 and 2019, although China’s GDP growth rate for 2019 fell to 6.11%.

  4. We obtain quite similar results using the other three measures of political turnover in untabulated results.

  5. In untabulated results, we obtain similar results using CHG_SECRETARYi,t, CHG_GOVERNORi,t, and CHG_BOTHi,t.

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Acknowledgements

We wish to thank the participants in the research workshop at the Shanghai University of International Business and Economics and Sun Yat-sen University for their helpful comments. Wei Yu gratefully acknowledges the financial support of the Shanghai Municipal Education Commission and the Ministry of Education of the People’s Republic of China (Grant No. 16YJA630070). Zheng gratefully acknowledges the financial support of the National Natural Science Foundation of China (Grant No. 72072190). All errors are our own.

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Authors and Affiliations

  1. School of Finance, Shanghai University of International Business and Economics, No. 1900, Wen Xiang Road, Song Jiang District, Shanghai, 201620, China

    Wei Yu

  2. School of Entrepreneurship and Management, ShanghaiTech University, Shanghai, China

    Jianjun Jia

  3. Center for Accounting, Finance and Institutions, Business School, Sun Yat-Sen University, Guangzhou, China

    Ying Zheng

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  1. Wei Yu
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  2. Jianjun Jia
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Appendix 1

Appendix 1

1.1 Variable definitions

Variable

Definition

Firm characteristics variables

WC i,t

The difference between the non-cash current assets and non-cash current liabilities (other than short-term debt) divided by the beginning-of-year book value of total assets in year t, winsorized at the top and bottom 1%

WCi,t = (non-cash current assetsi,t − non-debt current liabilitiesi,t) /total assetsi,t−1

ΔWC i,t

The difference between the changes in non-cash current assets and non-cash current liabilities (other than short-term debt) divided by the beginning-of-year book value of total assets in year t, winsorized at the top and bottom 1%

ΔWCi,t = (Δnon-cash current assetsi,t − Δnon-debt current liabilitiesi,t) /total assetsi,t−1

Cash i,t

Cash plus cash equivalents (include short-term tradable securities) divided by the beginning-of-year book value of total assets in year t, winsorized at the top and bottom 1%

ΔCash i,t

The changes in cash plus cash equivalents (include short-term tradable securities) divided by the beginning-of-year book value of total assets in year t, winsorized at the top and bottom 1%

FCInv i,t

Capital expenditures divided by beginning-of-year book value of total assets in year t, winsorized at the top and bottom 1%

ΔAssets i,t

The changes in total assets divided by the beginning-of-year book value of total assets in year t, winsorized at the top and bottom 1%

ΔOthAssets i,t

The changes in other assets divided by the beginning-of-year book value of total assets in year t, winsorized at the top and bottom 1%. Other assets are defined as the assets excluding cash, working capital and capital investment. ΔOthAssetsi,t = (ΔAssetsi,t − ΔWCi,t − ΔCashi,t − FCInvi,t) /total assetsi,t−1

Q i,t−1

Book value of total assets minus the book value of equity plus the market value of equity scaled by the book value of total assets in year t − 1, winsorized at the top and bottom 1%

CFO i,t−1

Cash flow from operating(CFO) divided by the beginning-of-year book value of total assets in year t − 1, winsorized at the top and bottom 1%

Ln_Assets i,t−1

Natural logarithm of average total assets in year t − 1, winsorized at the top and bottom 1%

Leverage i,t−1

Total debt (long-term and short-term) scaled by the beginning-of-year total assets in year t, winsorized at the top and bottom 1%

Sale_Growth i,t−1

Sales growth rate in year t − 1, calculated as sales in year t − 1 minus sales in year t − 2, scaled by sales in year t − 2, winsorized at the top and bottom 1%

ROA i,t−1

Operating earnings scaled by beginning-of-year total assets in year t − 1, winsorized at the top and bottom 1%

ΔReceivable i,t

The changes in receivables divided by the beginning-of-year book value of total assets in year t, winsorized at the top and bottom 1%

ΔInventory i,t

The changes in inventories divided by the beginning-of-year book value of total assets in year t, winsorized at the top and bottom 1%

ΔOther_Cassets i,t

The changes in other current assets divided by the beginning-of-year book value of total assets in year t, winsorized at the top and bottom 1%. Other current assets are current assets excluding cash, receivables, and inventory

ΔOther_Cassetsi,t = (ΔCurrent_Assetsi,t − ΔCashi,t − ΔReceivablei,t − ΔInventoryi,) /total assetsi,t−1

ΔPayable i,t

Change in accounts payable divided by the beginning-of-year book value of total assets in year t, winsorized at the top and bottom 1%

ΔOther_Cliabilities i,t

Change in other current liabilities divided by the beginning-of-year book value of total assets in year t, winsorized at the top and bottom 1%

ΔOther_Cliabilitiesi,t = (ΔCurrent_Liabilitiesi,t − ΔShort_term_debtsi,t − ΔPayablei,t)/total assetsi,t−1

ΔShort_Debt i,t

Change in short-term debts divided by beginning-of-year book value of total assets at year t,winsorized at the top and bottom 1%

SOE i,t

A dummy variable coded 1 if a government agency or state-owned enterprise is the ultimate owner of firm i in year t, and 0 if the ultimate owner is an individual, family, privately owned enterprise, or collective

Provincial-Level Turnover and Economic Variables

CHG_SECRETARY j,t

A dummy variable coded 1 if there is a change of provincial CCP secretary in the period from July in year t − 1 to June in year t for province j, and 0 otherwise

CHG_GOVERNOR j,t

A dummy variable coded 1 if there is a change of provincial governor in the period from July in year t − 1 to June in year t for province j, and 0 otherwise

CHG_BOTH j,t

A dummy variable coded 1 if there is a change of provincial CCP secretary and provincial governor in the period from July in year t − 1 to June in year t for province j, and 0 otherwise

CHG j,t

A dummy variable coded 1 if there is a change of provincial CCP secretary or governor in the period from July in year t − 1 to June in year t for province j, and 0 otherwise

PROMOTION j,t

A dummy variable coded 1 if there is a promotion of a outgoing provincial CCP secretary or governor in the period from July in year t − 1 to June in year t for province j, and 0 otherwise. Promotion is defined as a former government leader being promoted to a higher position in the central government, another province, or within the same province. If there is no political turnover in province j over the period from July in year t − 1 to June in year t, PROMOTIONj,t is treated as missing

DEMOTION j,t

A dummy variable coded 1 if there is a demotion of a outgoing provincial CCP secretary or provincial governor in the period from July in year t − 1 to June in year t for province j, and 0 otherwise. A demotion is defined as a former provincial leader losing his job for disciplinary or legal violations or being demoted to a lower-level position. If there is no political turnover in province j in the period from July in year t − 1 to June in year t, DEMOTIONj,t is treated as missing

GDP_Growth j , t−1

Real GDP growth for province j in year t − 1

Tenure_S j,t−1

A provincial CCP secretary’s tenure for province j in year t − 1

Age_S j,t−1

A provincial CCP secretary’s age for province j in year t − 1

Education_S j,t−1

A provincial CCP secretary’s education level for province j in year t − 1

Tenure_G j,t−1

A provincial governor’s tenure for province j in year t − 1

Age_G j,t−1

A provincial governor’s age for province j in year t − 1

Education_G j,t−1

A provincial governor’s education level for province j in year t − 1

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Yu, W., Jia, J. & Zheng, Y. Political uncertainty and corporate working capital in China. Rev Quant Finan Acc 61, 927–966 (2023). https://doi.org/10.1007/s11156-023-01171-2

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