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Nexus Effect: Unraveling the Impact of Political Patronage Connections on Corporate Investment
Published online by Cambridge University Press: 14 March 2025
Abstract
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This study investigates how political patronage influences local firms’ investment decisions in China, focusing on changes in patronage ties resulting from provincial leadership turnover. By examining prefectural officials with connections to their provincial superiors, we find that firms in these regions experience increased investment expenditures, albeit with reduced efficiency. This effect is primarily driven by stronger promotion incentives for local officials, bolstered by favoritism from provincial patrons. While political patronage helps address agency problems within political hierarchies, our findings highlight its adverse economic impact due to misaligned interests between politicians and the public.
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- Type
- Research Article
- Information
- Journal of Financial and Quantitative Analysis , Volume 60 , Issue 8 , December 2025 , pp. 4035 - 4064
- Creative Commons
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.- Copyright
- © The Author(s), 2025. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington
Footnotes
The authors express their gratitude to Kai Li (the editor) and an anonymous referee for their valuable feedback. They also appreciate the insightful comments received from Allan Huang at the 2023 China International Conference of Finance, Yunxiang Wang, Tom Smith, Weiqiang Tan, Buhui Qiu, and Terry Pan during seminars at Macquarie University (Nov. 2023), The Education University of Hong Kong (Mar. 2024), and Shanghai Jiao Tong University (Apr. 2024), as well as feedback from Arusha Cooray from James Cook University in Aug. 2022.
Funding: Shi acknowledges financial support from the National Social Science Fund of China (Project No. 23BJY108).
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