The Effect of Political Connections on the Distribution of Firm Performance

Political connections have the potential to redistribute rents toward connected firms, and away from unconnected ones. In this paper, we show that this is indeed the case for Chinese firms during 2008-2015. Connected firms (as proxied by CEO–mayor college ties) have higher return on assets and receive more government subsidies. Given the scarce resources in a city, leaders reallocate resources such as subsidies from non-connected firms to connected businesses. Non-connected firms thus generally experience declines in return on assets and government subsidies when political or executive turnover leads to the creation of a connected firm in the same city