Rent Seeking and Corporate Finance - CUHK Business School ...

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5. Does rent seeking facilitate capital allocation? 18The empirical results thus far have shown that the Chinese companies’ access to financialcapital critically depends on their rent seeking capacities. However, we are interested inknowing whether or not the rent seekers are also efficient firms who bribe or invest inrelationships because they are affordable. 19 It could be the case that China’s capital allocationsystem, though opaque, still manages to allocate financial capital to efficient firms. If so,exposing corruption scandals has a side effect of punishing efficient firms. A differentpossibility is that the rent seekers tend to be firms uncompetitive in terms ofmanagerial/production efficiency, but gain their competing edge through political connections oroutright bribery. In this scenario, the problem of China’s financial system is not just socialinjustice but also mis-allocation of capital. Fighting corruption is unambiguously desirablebecause it will punish bad firms and promote good firms. 20A third possibility is that given anon-transparent capital allocation system, everyone pays bribe to stay in the game, and whoevercaught is a random event. In this scenario exposing scandals is expected risk with noimplication on economic outcome.We are not able to examine the issue fully in this paper, as our sample and data are specificto the few corruption cases. Nevertheless, we attempt to address the question by examiningseveral performance measures of the event firms (relative to the non-event firms) both well(three-year) before and well (three-year) after their corresponding corruption cases erupt, so thatthe performance measures are away from the direct influence of the corruption cases per se.The performance measures capture the differences in profitability between the event and the18 This section has benefited from the suggestions of Bernard Yeung.19 Some argue that corruption can serve as grease to facilitate business transactions. This view has been expressed inbusiness press as well as in the economic literature (Lui, 1985).20 There exists a large amount of evidence that corruption slows down economic growth and domestic and foreigninvestment. See Bardhan (1997) and Aidt (2003) for an overview of the literature.26
non-event firms. 21If the event firms behave more as rent seekers because they are moreefficient than the non-event firms are, we would observe their pre-event performance superior tothat of the non-event firms, and their post-event performance no worse than that of the non-eventfirms. 22 However, if the event firms gain their competitive edge not from managerial/productiveefficiency but mostly from rent seeking, we would expect that removing their politicalconnections would lead to their poorer performance relative to the non-event firms. If therandomness argument is true, that the event and non-event firms are both rent seekers and theirrent seeking activities have little to do with their managerial/production efficiency, then therewould be little difference in their performance prior to the scandals, but the event firms mayunderperform the non-event firms after the scandals.Table 8 presents differences in mean and median performance measures between the eventfirms and the non-event firms. Performance is measured alternatively by return on assets (ROA),return on equity (ROE), operating margin (operating income divided by sales), return on sales(ROS), and the market to book ratio (market value of equity divided by book value of equity).As in the previous section, these performance measures are calculated for each of the event andnon-event firms at the fiscal year end of the third year before and the third year after thecorresponding corruption event year. From Panel A, the between-group performancedifferences before the events are generally positive in mean or median, but insignificantly soexcept for the market-to-book ratio. 23After the events, the performance differences are mostlynegative and statistically significant, except for the market-to-book ratio showing insignificantly21 The differences in profitability reflect the differences in both productivity and rent seeking capability between theevent and the non-event firms.22 We are assuming that the event and non-event firms are competing for an overlapping set of businessopportunities, and that the scandals per se do not have long lasting impacts on firm productivity.23 The event firms have higher market-to-book ratios, indicating that they may have greater growth opportunities dueto their political connections.27
Page 1 and 2: Rent Seeking and Corporate Finance:
Page 3 and 4: politically connected or bribing fi
Page 5: Twite (2005) report that corporate
Page 8: three policy banks 4 , ten national
Page 11 and 12: company’s senior managers, direct
Page 13: cases, we identify a matching firm
Page 17 and 18: events (Figure 3.2). 15Overall, the
Page 19 and 20: and 8), while significantly positiv
Page 22 and 23: 4.1. The event studyTo examine whet
Page 24: the Corrupt dummy as defined before
Page 29 and 30: 6. ConclusionsWe have examined the
Page 31 and 32: References:Acemoglu, D., and Johnso
Page 33 and 34: MacKay, P., and Phillips, G.M., 200
Page 35 and 36: Appendix 2Summary of the corruption
Page 37 and 38: imprisonment in 1998.Source: Commun
Page 39 and 40: Appendix 3Additional Robustness Tes
Page 41 and 42: Figure 1Leverage and CorruptionFigu
Page 43 and 44: Figure 3Long-term leverage and Corr
Page 45 and 46: Table 2Capital Structure, Debt Matu
Page 47 and 48: Table 3Differences in the Change in
Page 49 and 50: Table 4Fixed-Effect Regression Resu
Page 51 and 52: Table 5Fixed-effect Regression Resu
Page 53 and 54: Table 6Changes in Leverage and Stoc
Page 55 and 56: Table 7 (Continued)Panel B. Sub-sam

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