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 non-connected ones. In this paper, we show that this is indeed the case for Chinese listed firms during 2008-2015. Connected firms (as proxied by college ties between senior management and local leaders) have higher Return on Assets (ROA) and more government subsidies, while non-connected firms experience a significant decline in both ROA and subsidy when executive turnover or political rotation leads to the creation of connected firms in the city. The differential effects on non-connected firms within the same industry versus those in different industries suggest that non-connected firms outside the industry are more adversely affected due to leaders' attempts to mask favoritism with broad industrial policy.