Political Connection, Management Promotion and Risk Taking Activities

Qiaoyi Zhao, Suowen Wang, Chao Chen

China Investment Corporation, Beijing, China.
Department of Accounting, Business School, Beijing Normal University, Beijing, China.

DOI: 10.4236/me.2014.57071                

Abstract

This paper investigates how political connection and management promotion affect chances of risk-taking activities, in order to offer theoretical support for state-owned enterprises to select optimal managers, and to maintain and increase their company values. Using the data of chairman of state-owned listed enterprises in Shenzhen securities market, we find that in state-owned listed enterprises, the shorter the pyramid of listed enterprises to ultimate shareholders is, the closer the political connection is, the more likely the chairman is to take up risk-taking activities for promotion. While for the same pyramid, the longer the tenure of chairman, the more chances of risk-taking activities.

Keywords

Political Connection, Management Promotion, Firm Pyramid, Duration, Risk Taking Activities

Conflicts of Interest

The authors declare no conflicts of interest.

References

[1]	Hoskisson, R.E., Hitt, M.A. and Hill, C.W.L. (1991) Managerial Risk Taking in Diversified Firms: An Evolutionary Perspective. Organization Science, 2, 296-314. http://dx.doi.org/10.1287/orsc.2.3.296
[2]	King, T.H.D. and Wen, M.M. (2010) Shareholder Governance, Bondholder Governance, and Managerial Risk-Taking. Journal of Banking & Finance, 35, 512-531. http://dx.doi.org/10.1016/j.jbankfin.2010.07.011
[3]	Dong, Z.Y., Wang, C. and Xie, F. (2010) Do Executive Stock Options Induce Excessive Risk Taking? Journal of Banking & Finance, 34, 2518-2529. http://dx.doi.org/10.1016/j.jbankfin.2010.04.010
[4]	Chen, C.R., Steiner, T.L. and Whyte, A.M. (2006) Does Stock Option-Based Executive Compensation Induce Risk-Taking? Analysis of the Banking Industry. Journal of Banking & Finance, 30, 915-945. http://dx.doi.org/10.1016/j.jbankfin.2005.06.004
[5]	Konishi, M. and Yasuda, Y. (2004) Factors Affecting Bank Risk Taking: Evidence from Japan. Journal of Banking & Finance, 28, 215-232. http://dx.doi.org/10.1016/S0378-4266(02)00405-3
[6]	Delis, M.D. and Kouretas, G.P. (2010) Interest Rates and Bank Risk-Taking. Journal of Banking & Finance, 35, 840-855. http://dx.doi.org/10.1016/j.jbankfin.2010.09.032
[7]	Pathan, S. (2009) Strong Boards, CEO Power and Bank Risk-Taking. Journal of Banking & Finance, 33, 1340-1350. http://dx.doi.org/10.1016/j.jbankfin.2009.02.001
[8]	Jensen, M.C. and Meckling, W.H. (1976) Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3, 305-460. http://dx.doi.org/10.1016/0304-405X(76)90026-X
[9]	Merton, R.C. (1977) An Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees. Journal of Banking and Finance, 1, 3-11. http://dx.doi.org/10.1016/0378-4266(77)90015-2
[10]	Smith, C.W. and Stulz, R.M. (1985) The Determinants of Firms’ Hedging Policies. Journal of Financial and Quantitative Analysis, 20, 391-405. http://dx.doi.org/10.2307/2330757
[11]	Dong, J. (2010) The Principal-Agent Problem of State-Owned Assets Management. Property Rights Guide, 12, 34-36.
[12]	Xu, C.C. and Yan, J.W. (2011) Study on the Principal-Agent Problem of State-Owned Enterprises. Economic Review, 1, 92-95.
[13]	Chan, K.S., Dang, V.Q. and Yan, I.K. (2012) Chinese Firms’ Political Connection, Ownership, and Financing Constraints. Economics Letters, 115, 164-167. http://dx.doi.org/10.1016/j.econlet.2011.12.008
[14]	Li, S., Song, X. and Wu, H. (2014) Political Connection, Ownership Structure, and Corporate Philanthropy in China: A Strategic-Political Perspective. Journal of Business Ethics, 1-13.
[15]	Chen, C.M., Ariff, M., Hassan, T. and Mohamad, S. (2014) Does a Firm’s Political Connection to Government Have Economic Value? Journal of the Asia Pacific Economy, 19, 1-24. http://dx.doi.org/10.1080/13547860.2013.860761
[16]	Houston, J.F., Jiang, L., Lin, C. and Ma, Y. (2014) Political Connections and the Cost of Bank Loans. Journal of Accounting Research, 52, 193-243. http://dx.doi.org/10.1080/13547860.2013.860761
[17]	Laeven, L. and Levine, R. (2009) Bank Governance, Regulation and Risk Taking. Journal of Financial Economics, 93, 259-275. http://dx.doi.org/10.1016/j.jfineco.2008.09.003
[18]	Sun, Z. and Yu, X.H. (2007) Separation of Powers and the Choice of Accounting Firms. Auditing Research, 6, 52-58.
[19]	Xia, D.L. and Zhu, S. (2008) Level of the Pyramid and the Performance of Listed Companies. China Management Magazine, 2, 120-129.
[20]	Eisenmann, T.R. (2002) The Effects of CEO Equity Ownership and Firm Diversification on Risk Taking. Strategic Management Journal, 23, 513-534. http://dx.doi.org/10.1002/smj.236