This study uses government officials’ corporate site visits as a measurement of political connection and examines how political connection affects firm performance. Using a novel dataset on government officials’ site visits from 2004 to 2014, we find that firm performance increases following corporate site visits by government officials. This study finds that firms obtain more new investment projects and bank loans, improve corporate governance, and decrease information asymmetry as well. Government officials’ site visits are also associated with positive abnormal stock returns, indicating that investors interpret government officials’ site visits as a signal of government endorsement and support. Using China’s recent anti-corruption campaign as an exogenous shock, we find that political connections are more valuable in the absence of political corruption.

Introduction

The implications of political connections in the business world have attracted numerous academic and public attention. Previous studies have examined the influences of political connections on firm performance extensively. However, the literature finds mixed evidence concerning the relation between political connection and firm performance. Most previous studies find that firms benefit from political connections (e.g., Fisman, 2001). Firms with political connections receive more government contracts and regulatory relief (e.g., Brown and Huang, 2017; Bunkanwanicha and Wiwattanakantang, 2009); gain more access to bank loans (Khwaja and Mian, 2005; Li et al., 2008); are more likely to be bailed out (Faccio et al., 2006); and are more likely to receive government subsidies (Johnson and Mitton, 2003; Lin et al., 2015). On the other hand, some studies find that political connections hurt firm performance. Chen et al. (2011) examine top executives with a government background as a measurement of firms’ political connection and find that political connections significantly reduce investment efficiency in state-owned enterprises (SOEs) in China. Saeed et al. (2016) find that politically connected firms underperform non-connected firms by 17% and 15% based on return on assets and return on equity. Cao et al. (2011) document an unintended consequence of establishing a political connection—management entrenchment. They find that political connections significantly lower the CEO’s turnover probability and firm performance improves after politically connected CEOs are replaced. Despite the importance of political connections for firm performance, the relation between these two is inconclusive. Moreover, defining political connectedness is difficult. To measure political connections, researchers have investigated whether executives or board directors have a government background (Faccio and Zingales, 2017), whether firms provide campaign contributions (Mehta et al., 2017), whether corporate executives have personal relationships with politicians (Brown and Huang, 2017), or whether the firm is active in lobbying (Lambert, 2017). In this study, we use a more direct measurement of political connection—government officials’ corporate site visits, which refer to government officials’ field trips to firms. During these corporate site visits, firm executives can gain and maintain access to government officials and have opportunities to communicate directly with them on the firm’s strengths and challenges. Government officials can gain a better understanding of the needs of firms and draw up a corresponding plan to maximize both the economic interests and their political performance. Therefore, firms can build, maintain, and enhance political connections through government officials’ corporate site visits.