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China Journal of Accounting Research 6 (2013) 51–74

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China Journal of Accounting Research
journal homepage: www.elsevier.com/locate/cjar

Chairman’s government background, excess employment and government subsidies: Evidence from Chinese local state-owned enterprises
Xiongyuan Wang a, Shan Wang b,⇑
a b

School of Accounting, Zhongnan University of Economics and Law, China Antai College of Economics and Management, Shanghai JiaoTong University, China




Article history: Received 28 June 2012 Accepted 28 August 2012 Available online 21 December 2012 JEL classification: D73 G28 G32 H2 Keywords: Government background Excess employment Government intervention

Local state-owned enterprises (SOEs) in China continue to face government interference in their operations. They are influenced both by the government’s “grabbing hand” and by its “helping hand.” Our study examines how SOE chairmen with connections to government influence their firm’s employment policies and the economic consequences of overstaffing. Using a sample of China’s listed local state-owned enterprises, we find that the scale of overstaffing in these SOEs is negatively related to the firms’ political connections to government. However, this relationship turns positive when the firm’s chairman has a government background. Appointing chairmen who have government backgrounds is a mechanism through which the government can intervene in local SOEs and influence firms’ staffing decisions. We also find that in compensation for the expenses of overstaffing, local SOEs receive more government subsidies and bank loans. However, the chairmen themselves do not get increased pay or promotion opportunities for supporting overstaffing. Further analysis indicates that whereas the “grabbing hand” of government does harm to a firm’s economic performance, the “helping hand” provides only weak positive effects, and such government intervention actually reduces the efficiency of social resource allocation. Ó 2012 China Journal of Accounting Research. Founded by Sun Yat-sen University and City University of Hong Kong. Production and hosting by Elsevier B.V. All rights reserved.

⇑ Corresponding author.

E-mail addresses: wangxiongyuan72@163.com (W. Xiongyuan), sunny05fly@yahoo.com.cn (W. Shan).

Production and hosting by Elsevier

1755-3091/$ - see front matter Ó 2012 China Journal of Accounting Research. Founded by Sun Yat-sen University and City University of Hong Kong. Production and hosting by Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.cjar.2012.08.005


W. Xiongyuan, W. Shan / China Journal of Accounting Research 6 (2013) 51–74

1. Introduction Companies normally make decisions to maximize their profits, so managers would not be expected to accept projects that harm their firm’s economic performance. However, when managers of state-owned enterprises (hereafter, SOEs) make decisions about employment, they tend to hire more people than necessary, because these entities are especially established by the government to enhance the country’s rate of employment (Sappington and Stiglitz, 1987; Boycko et al., 1996; Dong and Putterman, 2001). Although a number of studies (Dewenter and Malatesta, 2001; Dong and Putterman, 2003) have demonstrated that political pressure or government intervention causes excess employment in SOEs, previous researchers do not clearly explain the connection between government intervention and overstaffing. In this study, we attempt to fill this void. Our study addresses questions such as how governments intervene in corporations and by what mechanism governments influence SOEs to employ extra people. We consider that politicians may choose to focus their interventions on SOEs because it is much more costly for them to interfere in private firms. Boycko et al. (1996) argue that politicians cause government-owned firms to employ a surplus of workers. Similarly, Dewenter and Malatesta (2001) find that government-sponsored firms tend to use more labor than their private-sector counterparts, because private firms are more difficult for governments to influence. Also, it has already been proven that appointing corporate executives who have a government background is an effective way for the government to influence SOEs. The power of politicians to appoint SOE chairmen and to control costs or rewards for businesses open up opportunities for governments to exert direct influence on SOEs (Tenev et al., 2002). More importantly, we argue that most SOE executives are motivated to earn more money and gain more opportunities for promotion, and these motives can lead them to facilitate government priorities. Political connections are considered a very important factor influencing the way firms perform (Fan et al., 2007) and the question naturally arises as to whether political connections affect company employment decisions. There are several reasons why China provides a natural laboratory for examining the effects of political connections on firm behavior. (1) State ownership is prevalent and the state sector is far from homogeneous, as most SOEs are controlled either by the central government or local governments (provincial or county level). (2) The government maintains heavy control over the economy and it often uses SOEs to serve political and social objectives, such as reducing unemployment or fiscal deficits. (3) The market for chairmen is underdeveloped in China, with many managers possessing close political ties to local and central governments but lacking professional qualifications or managerial experience. Therefore, we predict that examining the political connections of SOEs may provide answers for our questions concerning appointed chairmen and company employment policies. We investigate these possibilities further by examining a sample of local SOEs and considering a new determinant of overstaffing that previous studies have not explored. Although we mainly focus on the effect of chairmen with government backgrounds on excess staffing, we address several other issues as well. Particularly, we investigate whether overstaffing adversely affects corporate performance (Li and Liang, 1998; Xu et al., 2005; Zeng and Chen, 2006; Xue and Bai, 2008). We ask what benefits a corporation will receive if it hires more people than it really needs. Lin and Tan (1999) show that firms that practice overstaffing receive compensation in the form of lower taxes, more government grants and preferential treatment in competition for contracts. We expect that the problems of overstaffing may result from an exchange of benefits between firms and the government. If a firm agrees to employ redundant workers, then that firm will enjoy opportunities for easy access to bank loans and grants or preferential tax treatment. The firm receives such benefits, but do the firms’ executives gain any benefits? Another concern of our study is to determine whether corporate executives, especially chairmen, receive promotions or higher pay for supporting excess employees. To answer these questions, we manually collect detailed information on the chairmen of all of the local SOEs listed in A-share markets in China from 2004 to 2009. This information includes the chairmen’s past employment records, including any background they may have in government. We classify a company as being politically connected if its chairman is a current or an ex-government official. Then we compare the hiring practices of politically connected companies with those of other companies. Our findings are

2006. and outlines the econometric specifications. our paper adds to a growing literature that explores the effects of political connections on business. we find that a firm’s scale of overstaffing is negatively related to its accounting performance and positively related (to a significant degree) to its total labor costs. Li et al. 2. We find that appointing politically connected chairmen is the main mechanism through which the government intervenes in firms to promote the hiring of more employees. 1999) have focused on government interventions that affect excess employment.. Section 4 presents the data and descriptive statistics. our study (1) performs additional analysis on the connections between excess employment and firm performance (or labor costs). First. which is contrary to our prediction. we find no evidence that excess staffing is positively related to debt financing or to government subsidies. Lin and Tan. W.W. our analysis of the economic consequences from such political influence shows two main effects. We consider government pressure for excess employment as a typical example of the “grabbing hand” and compensatory bank loans or government subsidies as examples of the “helping hand. Finally. 2008. in company performance (Fan et al. Johnson and Mitton. a listed company’s chairman is more likely to be politically connected when the company belongs to a region with a lower per capita GDP and a higher unemployment rate. 1994.. This study attempts to fill this void in the literature and examine the effects of excess employment on firms in greater depth. The evidence indicates that local SOEs with chairmen who have government backgrounds receive more bank loans and more government grants than those without such a political connection. 2003). By controlling for other factors that influence firm performance (labor costs). these authors find that the effect of political connections on employee allocation efficiency is influenced by the firm’s ultimate controller. but a positive effect on the chairman’s relative compensation.. (2010). we concentrate on how governments actually influence corporations to hire more people. Second. 2007) and in mode of operations (Bertrand et al. However. Our study contributes to several strands of the literature. Political connections are already considered an important factor in the valuation of firms (Fisman. 2001. after controlling for other factors that influence firms’ staffing. Concerning the chairman’s compensation. One of the few studies examining this issue is that of Liu et al. our paper contributes to the literature on how government policy affects business in general. We consistently find that the overstaffing problems in firms run by politically connected chairmen are more serious than in firms that are otherwise similar. we find that having politically connected chairmen has a significant positive relationship with excess employment by local SOEs. Also. Dong and Putterman.” The remainder of this paper is organized as follows. the evidence from this research enriches our understanding by showing how the appointment of chairmen with government backgrounds helps the government to promote overstaffing by SOEs. However. Xiongyuan. Prior studies (Shleifer and Vishny. However. Finally. 2008). Section 2 discusses the prior literature and develops the hypotheses. Section 5 empirically tests the hypotheses and reports the results. Section 3 describes the sample and variables. Claessens et al. First. . Institutional background and hypotheses In this section. To better understand the overstaffing problem of China’s local SOEs. and (2) investigates how the social objectives of politicians influence the appointment of politically connected CEOs. Shan / China Journal of Accounting Research 6 (2013) 51–74 53 as follows. we find that excess employment is negatively related to the chairman’s prospects for promotion. However. a firm’s overstaffing has a negative effect on its chairman’s total compensation. the question of whether or how the political connections of company chairmen affect excess employment is not well explored. The evidence from our paper supports both the “grabbing hand” model (showing how politicians can intervene at the expense of business activities) and the “helping hand’ model (showing how politicians can provide privileges and benefits to corporations) (Shleifer and Vishny.. Using cross-sectional data. 1994). Second. Section 6 provides conclusions. (2010) do not examine the economic consequences of excess employment. we discuss the institutional background of China’s business environment and develop our hypotheses regarding the effects of political connections on excess employment and on the economic consequences of the overstaffing problem. 2003. Liu et al.

A number of recent studies (Chen et al.54 W.. Obviously. we develop our hypotheses concerning the relationships between excess employment in local SOEs and the government backgrounds of SOE chairmen.” political connections are a substitute for the presently flawed institutions in transitional countries. it can effectively defend itself against infringements that the authorities seek to impose on companies. Yu et al. private entrepreneurs search for new approaches to protect themselves.. 2002). 2007.” political connections are a kind of reputation-building mechanism (Luo and Zhen. Yuan. in view of the government’s “grabbing hand. or GDP. many government agencies began to establish business entities and many bureaucrats became managers of these businesses (Li. 2005. Chairman’s government background and excess employment A series of studies beginning with Roberts (1990) point out that political connections in corporations are a worldwide phenomenon in both developing and developed countries. 2008) suggest that private firms are far more likely to participate in political affairs in countries with high levels of corruption and low levels of property protection (Chen et al. ..” However. First. such connections are more common in countries that are perceived as highly corrupt or that impose restrictions on foreign investments by their citizens.. Hypotheses development In this section. Under conditions of discriminative policies. Some firms might hope that political connections will protect them from such pressure. but we argue that excess employment has a negative relationship with political connections. 2006). As a relationship-based transitional economy. these officials have an interest in keeping regional rates of development and employment high during their periods in office (Li and Zhou.. Li et al. Although theoretical analysis suggests that political connections negatively affect a firm’s scale of overstaffing. Shan / China Journal of Accounting Research 6 (2013) 51–74 2. What are the causes of political relations in business? There are two explanations. this view emphasizes the role of political connections for resisting the government’s “grabbing hand. Chinese society is pervaded by the ubiquitous phenomenon of guanxi (or relationships). there is little empirical evidence for this argument. officials at all levels of government have an incentive to intervene in SOEs and use these firms to help solve political and social problems.1. Although these ex-bureaucrats have officially quit the government. If a company has a good political connection with the government. Li et al. because overstaffing results in higher labor costs and worsens firm performance. 2006. 2005). 2006).1. Background During the economic reforms of the 1980s. 2006. 2000. The word describes a subset of Chinese personal connections in which one individual is able to prevail upon another to perform a favor or service (Chung and Hamilton. with which they can seek benefits or rents directly from the authorities (Michelson. they still keep good relations with their friends or ex-colleagues in government.2. A few empirical studies examine the relationship between political connections and excess employment and show that politically connected corporations undertake too many tasks for politicians (Bertrand et al. Faccio. Firms take this mechanism as a kind of social resource. the Chinese government launched a program allowing bureaucrats to quit their government positions and join the business community. Political connections are one type of “guanxi. Faccio. Yu and Pan. 2010).” The state gives preferential treatment to firms with political connections and uses its political power to intervene in the firms’ operations or corporate governance. a phenomenon that later came to be known as “xiahai” (jumping into the sea). concerning the government’s “helping hand. 2011). W. than in countries with more transparent systems (Faccio. Therefore.. 2008). Xiongyuan. 2006. 2005. However. 2. 2006). Starting in the mid-1980s. the Chinese government’s pressure to hire extra employees is a typical instance of the grabbing hand. As the promotion of regional officials to higher-ranking positions depends largely on their region’s economic growth. Business managers do this because politicians require their closely connected firms to help solve unemployment problems by hiring extra workers (Bennedsen. These ties help to keep government and business linked together.2. 1998). Many company managers feel it has been proven that keeping a close connection with the government is the most effective means of self-protection. Second. 2.

. Hence. tax reductions. recent studies show that appointing people with government backgrounds as SOE chairmen helps politicians to achieve their employment goals. the government still firmly controls appointments and dismissals of key personnel in these companies (Qian. Prior studies conclude that redundant employees cause either increased labor costs (Zeng and Chen. the enterprises bargain with the government for ex ante policy favors. it may be that he is willing to help the government intervene in his firm in exchange for higher pay or more promotion opportunities (Brickley et al. 2006) or decreased firm performance (Li and Liang.. through what kinds of political connections can the government most effectively intervene? Prior studies have already provided us the answer to the first question. SOEs usually sustain a much greater burden of overstaffing than other firms (Dewenter and Malatesta. Consistent with this argument. an empirical study by Xue and Bai (2008) uses Chinese data and finds that firms with redundant workers receive more government subsidies. These researchers believe that SOEs are much more easily influenced by government intervention and much more likely to pursue social objectives rather than maximizing profits. Boycko et al. They feel it is important to improve the employment rate under their jurisdiction. As to the second question concerning the means of intervention. In terms of the firm. Gillan et al. 1999. such as low-interest loans. W. 2001.. why would he voluntarily act as the link for government intervention in promoting excess employment? If the government does not compensate local SOEs for their losses from overstaffing. and so on. . Zeng and Chen. However. Cao et al. In what kinds of firms is the government likely to interfere? Also. 1995). In China’s gradual process of SOE reform. firms with redundant employees request the government to offer some policy favors. (2012) find that CEOs with a higher likelihood of political promotion have lower pay levels. why would these firms employ more people? We predict that an exchange of benefits exists among local governments. if a politically connected chairman facilitates the government’s agenda for overstaffing. the firms may sustain losses and suffer severe financial problems in the short run. Xu et al. Lin and Tan (1999) demonstrate theoretically that in exchange for supporting redundant workers. Furthermore. Consequently. the following questions need clarification. Xiongyuan. but the promotion and the compensation of politically connected chairmen are more affected by their performance toward various political and economical goals such as growth in GDP or the employment rate (Liu.W. 2005). In conclusion. 2006). The above analysis leads to our first hypothesis: Hypothesis 1. chairmen and local SOEs. which shows that political promotion could be a substitute for pay. 1987. Local governments often choose to intervene in SOEs (Sappington and Stiglitz. Shan / China Journal of Accounting Research 6 (2013) 51–74 55 To work out these contradictory results concerning political connections. Like politicians. Local SOEs with chairmen who have a government background are more likely to support excess employment. local SOEs may receive some policy favors for supporting excess employment. As it is more costly for the government to intervene in private firms. If a chairman is interested in political promotion.. 1998. they are affected by their region’s performance in various political and social objectives. These chairmen. 1996). 1999. tariff protections. 2009). enjoy the same promotion and compensation mechanisms as politicians. Economic consequences of excess employment: firm/chairman level If a chairman who has a government background does not gain any personal benefits. Although each listed firm has a board of directors. 2005). the chairmen of SOEs are generally nominated by the government and then rubber-stamped by the board. then he exhibits a politician’s objective function: he tries his best to cater to the will of the government (Zhang.. We also expect that the relationship between excess employment and the chairmen’s promotions (or compensation levels) will be strongest in politically related firms. 2. 2008). If the government does not grant these firms some benefits.2. legal monopolies. Chairmen are judged by their firm’s economic performance. we expect there is a reward of promotion or higher pay for the chairman. the government achieves its intervention for excess employment by local SOEs. especially those who have political connections. Chen et al. through appointing politically connected chairmen. Concerning the chairman.2.

Wu et al. Hypothesis 2B. The CCER classifies firms into the following three types: (1) local SOEs that are owned by various local governments. Additionally. whose ultimate owners did not change from 2004 to 2009. education. Xiongyuan. We manually collect the chairmen’s information from the CSMAR financial database. (2006) show that politicians give aid to politically connected firms. Sample selection To test these hypotheses. Similarly. (2009) demonstrate that chairmen with experience working in government have a positive relationship with the authorities and smaller tax expenses. they may be compensated for their expenses by gaining preferential access to financing and government subsidies. Furthermore. The information on SOE controllers is gathered from the CCER China stocks database. Therefore. Our study calls for identifying local SOEs according to the identity of their ultimate controllers. Our sample period begins in 2004 because it was not until this year that the CSRC (China Securities Regulatory Commission) explicitly required listed corporations to disclose their executives’ work experience in annual reports. According to each CEO’s profile information. from which we can obtain information about chairmen’s government backgrounds. We differentiate between central and local SOEs because they are affected differently by different levels of government. Chen (2003) and Bertrand et al. which is expressed in two parts: Hypothesis 2A. and this likelihood is higher if the chairman has a government background. firms listed in the province of Xizang are also excluded because their macroeconomic data is not completely disclosed. gender. The above analysis leads to our second hypothesis. allowing more debt financing or grants. . whose ultimate owners are nongovernment units such as individual entrepreneurs. For our tests. which provides detailed information on the ownership of China’s ten largest shareholders and the ultimate shareholders of stock market-listed firms. data on unemployment rates and per capita GDP for different regions in our sample period are retrieved from the China Statistical Year Book. Within the sample. For our tests of chairmen’s government backgrounds and firms’ excess employment. 2003. we need lagged firm performance information. Faccio.. 3. The accounting and financial data of listed firms was also obtained from the CSMAR database. In this study. firms in the financial industry sector are excluded because their accounting measurements different from those of others. we also exclude firms with missing data on necessary variables. and (3) non-state firms (or private firms). we traced their political connections by examining whether he/she is currently or was formerly a government official. which provides detailed information including age. we restrict our focus to A-share local SOEs listed on China’s stock markets. we argue that if local SOEs take on excess employees.1. Claessens et al. a chairman’s government background will strengthen the positive political connection. Finally. We also exclude firms with fewer than 200 employees according to Zeng and Chen (2006). W. Chairmen in firms with excess employment are more likely to receive higher pay or promotions.56 W. professional background and employment history on most corporate executives. 2006. Also. (2) central SOEs that are owned by the central government. Research design 3. Firms with excess employment are more likely to have better access to debt financing or government subsidies. we mainly focus on local SOEs. and this likelihood is higher if the chairman has a government background. Empirical evidence (Johnson and Mitton. so this data starts from 2003. listed firms began to formally disclose their ultimate controllers in annual reports starting in 2004. Shan / China Journal of Accounting Research 6 (2013) 51–74 A number of studies find that political connections play the role of a “helping hand” for firms in transitional countries. including CEOs’ biographical profiles. 2008) indicates that politically connected firms have greater access to debt financing than their non-connected peers. We also examine the credibility of this personal information through Internet searches.

Then we define the prediction error as excess employment and construct two variables to measure excess employment. SalesGrowth is the growth ratio of sales and FixedAssets is fixed assets divided by total assets. asset growth. and 0 otherwise. if a firm is classified in the textile industry and its chairman has worked as head of the government’s department of textiles. and 0 otherwise.2. Drawing from previous research (Wang and Wang. We define this variable as the logarithm of the chairman’s compensation. We also employ another proxy variable (DirectorPay2) to measure chairmen’s compensation. Political connection (Political). Xue and Bai. industry and year dummies are also included. asset structure. for instance. 3. Then models (2) and (3) test the economic consequences of excess employment for H2A and H2B. the stock percentage of the largest shareholder and regional institutional variables such as per capita GDP. Xiongyuan. According to the Jones model system. equals 1 if the chairman of the firm is a current or former government official. chairman’s age and tenure. Size is the logarithmic transformation of total sales. which equals 1 when there is a promotion for the chairman of the firm i in year t. b1. the variable Gov_Political equals 1. Dependent and independent variables for model (1) Excess employment (Exc_L). Exc Lit ¼ a þ b1 Politicalit or Gov Politicalit þ b02 Controlsit þ eit Pay it or Promotionit ¼ a þ b1 Gov Politicalit þ b2 Exc Lit þ b3 Gov Politicalit à Exc Lit þ b04 Controlsit þ eit Debtit or Subsidy it ¼ a þ b1 Gov Politicalit þ b2 Exc Lit þ b3 Gov Politicalit à Exc Lit þ b04 Controlsit þ eit where i denotes the sample firm and t denotes the year in the sample period. Dependent and independent variables for model (2) Pay and Promotion are the dependent variables in this model. As the compensation data for each chairman is not completely disclosed. unemployment rate and marketization index. Gov_Political. we use the following three regression models. we include the following control variables in the model: managerial ownership. Ordinary least squares is used to obtain estimates of a. W. This rating would apply. 2008). To particularly examine the special role that the chairman plays in a firm’s excess employment. b3 and b4 respectively. which equals 1 if it is greater than 0. we use the compensation of the firm’s top three managers to proxy for it. we employ a variable. which equals the prediction error if it is greater than 0. we include variables in the model controlling for size. Shan / China Journal of Accounting Research 6 (2013) 51–74 57 3. DirectorPay2 = Ln (top three manager’s compensation/employees total compensation). DirectorPay1 is a continuous variable for the chairman’s compensation. Here. To control for industry and year effects. chairman-CEO duality and the . The second variable is Exc_L_Dummy. sales growth. respectively. 2006) to control for the determinants of firm’s employees.2. and 0 otherwise. we use the following expectation model suggested by prior studies (Zeng and Chen. for each firm i in year t: Act Lit ¼ a þ b1 Sizeit þ b2 AssetsGrowthit þ b3 SalesGrowthit þ b4 FixedAssetsit þ eit ð 4Þ ð 3Þ ð 2Þ ð 1Þ where Act_L is the number of employees at the end of a fiscal year divided by the millions of dollars of firm sales. 2009). the explanatory variable in Hypothesis 1. AssetGrowth is the growth ratio of capital investment. and 0 otherwise.1. We also control for chairman duality. leverage and firm age. 2001.2.2. b2. 3. performance. The first variable is Exc_L. If the firm’s chairman is or ever was the head of the industry that his or her firm belongs to. 2007. Model (1) tests the relationship between politically connected chairmen and their firms’ excess employment for H1. Models and variables To test our hypotheses. is calculated as follows. Promotion is a dichotomous measure for chairman promotion. We run a Tobit regression for the first measurement and a logistic regression for the likelihood of firms’ excess employment. Fang.W. the dependent variable. Following the example of prior studies on excess employment (Dewenter and Malatesta.

Panel B also presents the percentage of chairmen with government backgrounds in these politically connected firms across industries.1. Others define CEOs who are friends. This suggests that the government maintains direct influence in a significant portion of firms through appointing politically connected chairmen.g..) of the continuous variables for the subsample where firm chairmen are politically connected. (2010). and maximum value (Max. Definition of politically connected chairmen There are various definitions of “political connections. However. we control for different variables in debt and subsidy regressions. electric power. In the subsample of political connections (1040 observations).27% of the chairmen in our sample have political connections with the government. Shan / China Journal of Accounting Research 6 (2013) 51–74 stock percentage of the largest shareholder. These results show that of the 1040 observations of firms with political connections. transportation..49. this study focuses on firms’ chairmen. 2001. Although the proportion of chairmen with political connections is similar across industries. For model (3). or long-term debt ratio (calculated as long-term debt plus the current portion of long-term debt divided by total assets). and (3) Debt3. or short-term debt ratio (calculated as short-term debt divided by total assets). we define politically connected CEOs as CEOs who are former bureaucrats. Table 2 provides the mean. 3. Data and descriptive statistics 4. telecommunication. The mean value for Exc_L is 0. there are relatively more politically connected chairmen in the manufacturing industries. etc. 2007). Finally. manufacturing. and 0 otherwise.” Siegel (2007) defines all CEOs who are from the same region as the president as politically connected CEOs.2. In the subsidy model. Following prior studies (Faccio et al. 125 in the services and trade sector. W. Yu and Pan. This panel shows that the number of chairmen with government backgrounds is similar across this period and approximately 35. minimum value (Min. 2003).). leverage and performance. Government subsidies are calculated as the sum of direct government subsidies. We also control for firm characteristics such as size. Xiongyuan. Panel B reports the distribution of politically connected firms in different industry sectors. Dependent and independent variables for model (3) Debt and Subsidy are the two dependent variables in this model. retail and utility industry sectors. 2006. 601 firms or 57. former colleagues and relatives of incumbent bureaucrats as politically connected CEOs (Fisman.79%. Panel A of Table 1 presents the number of politically connected chairmen of listed local SOEs between 2004 and 2009. 2008). electric power. The definitions of the regression variables are provided in Appendix A.). we include an industry variable that equals 1 if the firm is in a monopolized industry (e. with the industry categories classified by the CSRC (China Securities Regulatory Commission).1 and on prior studies (Bertrand et al. in our paper.3..58 W. divided by total assets (or net income). besides firm characteristics and year dummies. To examine the effect of excess employment on the receipt of government subsidies. 4. 4. we employ three measures to capture debt financing: (1) Debt1.). More specifically. suggesting that the average number of excess employees for every 1 million in sales is . (2) Debt2. have chairmen with government backgrounds. We define chairmen with government backgrounds as chairmen who have government experience in the same industry in which they are now working. we include marketization indexes according to Yu et al. 94 are in the natural resources sector.. year and industry dummies are also included. we introduce the variable Subsidy. Descriptive statistics Table 1 provides a description of the sample. standard deviation (std. 2006. 65 in the public utilities sector and 116 in the transportation sector. Fan et al. We can see from the table that in the agriculture.2. In the debt model. 443 in the manufacturing sector. Johnson and Mitton.2. or debt maturity (defined as long-term debt plus the current portion of long-term debt divided by total debts). dev. based on the analysis in Section 2. financial refunds and tax refunds from the financial statements of the listed firms. over half of the corporations have chairmen with government backgrounds.

06 2009 503 330 173 34.39 94 54.1356 0.W.18 58.0102 0.4937 0.1694 0.3417 0. as well as test statistics for differences in the mean and median values between the subsamples.3311 11.2121 0.33 Total 29 17 443 94 23 116 13 125 41 65 10 64 1040 2008 506 328 178 35.4071 for firms whose .66 7.29 103 61.65 16.5598 0.0042 0.93 105 58.4032 0.9251 8. 1040 1040 1040 1040 1040 1040 1040 1040 1040 1040 1040 1040 1040 1040 1040 1040 1040 1040 Mean 0.3269 12.1609 0.0000 15.7843 0.0002 Std.6824 0.29 2007 501 321 180 35. Table 3 reports the mean and median values of the dependent variables for the sub-samples distinguished by Gov_Political. We first examine the statistics of Exc_L.3351 5.79 Panel B Distribution of firms by industry Farming 17 Mining 7 Manufacturing 257 Electric power 65 Construction 10 Transportation 75 Information technology 1 Wholesale and retail 89 Real estate 21 Social service 44 Culture 0 Integrated industry 15 Total 601 Table 2 Descriptive statistics.27 601 57.61 0.01 69.1430 5 10 0 Max 7.8207 5.8495 0.6724 0.79 Panel A Distribution of firms by year Local SOEs 466 Without political connection 299 With political connection 167 Proportion (%) 35.0192 0.86 1.6033 À0. but only 0.6022 24.1498 0.85 0.0947 0. Year 2004 2005 487 320 167 34. Consistent with hypothesis 1.8384 15.1854 3.5998 9.22 67.34 59 Total 2949 1909 1040 35.1282 3.1644 0.7427 3.1004 0.5149 12.7971 40. Shan / China Journal of Accounting Research 6 (2013) 51–74 Table 1 Numbers of politically connected chairmen.8779 29 84.8588 0.5475 1. dev.0011 Min 0 0 0 0.00 23.62 41.9599 0.44 57.69 0.49.3520 14.0000 À0.1851 1.1 4.0059 0.9106 25.3199 0.2031 0.48 64. Xiongyuan.0923 0.84 Government background 99 Proportion (%) 59.15 43. we winsorize the continuous variables at the top and bottom 2%.1312 0.01 102 58.2645 9. 1. Variables Exc_L Debt1 Debt2 Subsidy1 Subsidy2 DirectorPay1 DirectorPay2 Marindex Govindex Lawindex FixedAsset AssetGrowth SaleSize SaleGrowth Leverage ExistAge FirstShare Mshare Obs.18 98 55.53 0.2592 0.0526 5.28 Industry Government background Political connection 12 10 186 29 13 41 12 36 20 21 10 49 439 Government background (%) 58.0601 21.71 10.9019 1.69 71.68 2006 486 311 175 36.20 51. we find that for firms with a political connection the mean of excess employment is 0. W.557 per 1 million sales.1930 8.4294 0. To reduce the influence of extreme observations in the results.0630 1.

but a negative correlation between Exc_L. In this regression.0000 0.1658 0. the correlation between Exc_L and Gov_Political is positive and significant at the 5% level.0019 0. 5.1508 0.0342 0.0000 0.0026 0.0532* À0.0540* 0.1060*** 1.0000 0.0754** À0.0000 À0. 439 439 439 439 439 439 439 58 Mean 0.0231 0.1721 0.3985 3.0087 À0. . and in columns 2 and 4 the dependent variable is Exc_L_Dummy.2624 0.0218 0.557 0.327 0.0676*** 0. *** Significance at the 1% levels. the mean pay for chairmen is 12. Empirical analysis 5.15 drop in the mean is statistically significant using a two-tailed t test. Exc_L Exc_L Gov_Political Debt1 Debt2 Debt3 Subsidy1 Subsidy2 DirectorPay1 DirectorPay2 ROA TobinQ * ** Gov_Political Debt1 Debt2 Debt3 Subsidy1 Subsidy2 Director Director ROA Pay1 Pay2 TobinQ 1. Government background and excess employment Table 5 reports the results of model (1).1930*** 0.0202 À0.5135*** 1.5892*** 0. The 0.2567 ** Wilcoxon Z À1.3872 6.0674** 0.816* 0.0000 À0.0543* À0.0465 1.2451*** À0.0000 0.1718*** 1. ** Significance at the 5% levels.2552 0.1688*** 1.0273 0.3858*** À0.1012 À0. Significance at the 5% levels.0237 0.0665** À0. DirectorPay1 and ROA.174 À0.2969 5. The variables that we want to investigate are significantly correlated (as the Pearson correlation matrix of Table 4 has shown).3324*** 0.0602* 0. Shan / China Journal of Accounting Research 6 (2013) 51–74 Government background (Yes) Obs.431 Median 0 0.4086 Median 0 0.3576 12.7287*** 0.258 Exc_L Debt1 Debt2 Subsidy1 Subsidy2 DirectorPay1 DirectorPay2 Promotion ÃÃÃ * 601 601 601 601 601 601 601 71 Significance at the 1% levels.0807*** À0. chairman is not politically connected.0710** 0.0421 À0.7442* 1.0436 À0.60 Table 3 Mean and median tests.5179 4.1527 0.2526 0.409 À0. Table 4 Pearson correlation matrix.7638 À0.0711** À0. Similarly.29 for local SOEs with chairmen of a government background.0000 0.2849 12.0056 0.0939*** À0. The difference between the mean values of firms with and without political connections is statistically significant.3484 1. The table shows a positive correlation between Exc_L.1749 À1.0824*** À0.0065 À0.0406 À0.1439*** À0.2828*** À0.735 À1.0627** À0.0571 12.0515* 1. Mean 0. Debt2 and Subsidy1.0439 1.4457*** À0. Political and Gov_Political.8752 À1.192 À1.264 0. Significance at the 10% levels.0000 0.0061 0. These variables represent political connection and government background respectively.7416 0.0409 1.1211*** 1.1314*** À0. W.0747** À0. As expected.0000 0.0221 0. the dependent variable in columns 1 and 3 is Exc_L.0000 Significance at the 10% levels.0000 À0.6075*** 0.497 1.8926 0 Government background (No) Obs.1013*** 0.2000*** À0.0418 0. Xiongyuan.505 1.1115*** 0. Variables W.1091*** 1.0508 12.4071 0.1.3938 0 T Statistics À2.0022 0.0435 0.0885*** À0. so we introduce the two variables.1757 0. The Pearson correlation coefficients for the dependent variables used in our analysis are reported in Table 4.

W.0422 3.64 0.07 0.76 À0.39 0.644 À5. the results show that ROAtÀ1 is significantly and negatively related to the dependent variable.ÃÃ.0606Ã À1.00145 À0.29 0.004ÃÃÃ À4.75 À0.103ÃÃÃ À5.294ÃÃÃ 4.ÃÃÃ Indicate significance at the 10%.486 1.085ÃÃÃ À2. .60 0.155 À0.86 0.68 À3.28 À0.81 À0.116Ã 1.145ÃÃÃ À4.0116Ã 1. Local SOEs in regions with weak institutions are more likely to face the problem of overstaffing.0444ÃÃ 2.82 0.67 0.0980 0.01 À0.39 0.66 À0.181 À0.204ÃÃ 2.141ÃÃ À2.42 ÃÃÃ Exc_L_Dummy À4.14 À0.95 0.00 0. This indicates that the chairman’s government background is the mechanism through which the government realizes its intervention for overstaffing in local SOEs. respectively.0663 0.59 0.34 À1.0885ÃÃÃ À4.00 0.357Ã À1.27 0.20 2949 0.47 À0.18 À0.0561 10.00903 0.000555 0.81 0.0428ÃÃÃ 3.78 ÃÃÃ 61 Political connection (1040) Exc_L_Dummy À4.00315ÃÃ 2.85 0. The higher government intervention index score means less government intervention. the further analysis in columns 3 and 4 demonstrate that having a chairman with a government background has a significant positive relationship (5%) with overstaffing in the politically connected subsample (1040 observations).555ÃÃ 2.000342 0.0251 À0. Shan / China Journal of Accounting Research 6 (2013) 51–74 Table 5 Government background and excess employment.150 À1. as evidenced by the negative and significant coefficient on Govindex. as shown by the positive relationship between Exc_L and Unemploy.31 À2. 5% and 1% levels.00300 À0.138 7.0887 À0.13 À0.196 4.69 À0.07 0.137ÃÃ 1. at a significance level of 1%. Excess employment Total sample (2949) Exc_L Constant Political Gov_Political Govindex Unemploy FixedAsset AssetGrowth SaleSize SaleGrowth ROAtÀ1 Leverage ExistAge Audittype Dual FirstShare Observations R2 Adj-R2 or Pseudo R2 F-value À0. Table 5 indicates that firms located in regions with higher unemployment rates tend to hire more employees.263Ã 1. However.80 ÃÃÃ Exc_L 3.101 À0. which implies that the government tends to intervene to promote overstaffing in firms with poorer performance. which is consistent with the findings of Shleifer and Vishny (1994) and Lin and Tan (1999).0649 0.136 À1.98 À0.0475 Note: (1) Ã.0623 0. (2) Year and industry dummies are included in the regressions but not reported.304ÃÃÃ À4.92 À0.483 0.32 À0.345Ã 1. such as pressure to employ more people.278ÃÃÃ 7.29 À0. The regression results in columns 1 and 2 of Table 5 show that political connections are negatively related to excess employment.60 0.808ÃÃ À2. Table 5 also shows that local SOEs with higher government intervention index scores are less likely to sustain excess employment.19 À0.130ÃÃ À2.28 1040 0.71 0.85 À0.0447 0.644ÃÃÃ À4. This means that the general political connections can potentially help firms resist government intervention.01 À0.47 À0.46 0.80 0.86 0.183 1.127ÃÃÃ À2.211ÃÃÃ 2.07 0.0342 0.87 À0.0470 3.08 2949 0. rather than in better-performing firms.603 0.200 À0.0930 À1.96 À0.225ÃÃÃ À6.409ÃÃÃ À4.38 0. In addition.247Ã À1. W.07 0.13 1040 0.726Ã À1. Xiongyuan.19 À3.25 À0.0665 0.

73à (1.2. when it comes to the relative level of chairmen’s payment (as shown in columns 4.91) À17.190Ãà (2.72) À0.62 W.84) À28. The effects of excess employment on Local SOEs – chairman level Prior research indicates that overstaffing is negatively related to a firm’s performance.841 (0.47ÃÃà (À3.2.98) À0.356ÃÃà (À2.69) 0.11) 0.837 (0.49ÃÃà (À3.3571 36.365ÃÃà (À3.22) 0.93) 1029 0.0612ÃÃà (À5.00625ÃÃà (À4.1878 16. excess employment is negatively related to chairmen’s compensation at the absolute level.23) 29.732 (À0.869ÃÃà (6.80 À0.80) 1029 0. Contrary to our initial projections. Shan / China Journal of Accounting Research 6 (2013) 51–74 In summary. what does the chairman gain from this behavior? As previously discussed. (2) Year and industry dummies are included in the regressions but not reported.23) 3.47) 0.3565 34.74) 0.36) À0. just as we predicted in Section 2.575 (0.17) À0.95) À0.0743ÃÃà (À3.85 À0.000451 (À0. Director Pay1 Constant Exc_L Gov_Political Gov_Political à Exc_L FixedAsset SaleSize ROA Leverage Dual FirstShare Mshare Audittype Observations R2 Adj-R2 F-value À0.15) 3. Table 6 also shows that in firms whose chairmen have a government background.66) 0. 5% and 1% levels.869 (0.85 Notes: (1) Ã.ÃÃ.537ÃÃà (6.190Ãà (2.97 (À0.2027 0.734 (À0.95) Director Pay2 À10.17) À0.0722 (1.263ÃÃà (13.12) 15.868ÃÃà (6.0787 (1.265ÃÃà (13.55) 1.1893 15.43ÃÃà (4.90) 1.1997 0.98) 0.01) 15. However.3555 38.3671 0.0794à (À1.356ÃÃà (À2. 5.582à (À1.144Ãà (2.89) 1.28ÃÃà (4. and 6). Therefore we ask. Table 6 presents the empirical results on the relationship between excess employment and chairmen’s compensation.14) 0.854ÃÃà (6.66) 0.24) 3.0792à (À1.265ÃÃà (13.0619ÃÃà (À5.00635ÃÃà (À4. when a firm incurs the expenses of overstaffing. respectively.93) 1029 0.93) 0. the coefficients of Exc_L on DirectorPay2 are significantly positive (1%).42ÃÃà (À3.17à (1.38 (À0.93) 1.99) 0.0740à (À2.46ÃÃà (4.89) À0.92) À0.29) 31.377ÃÃà (À3.47) 0.32) À0.05) À0.22) 0.502ÃÃà (18.0353 (À0.509ÃÃà (18. In other words.505ÃÃà (7.23) 29.05) À0.15) À0.90) 0. This section of our paper will examine the results of supporting excess employment for the firms’ chairmen. One explanation for this result may be that our measure of the chairmen’s compensation is based on the compensation of the top three executives in each firm.3649 0. The Table 6 Excess employment and chairman’s compensation.574 (0.502ÃÃà (18.178Ãà (2.01) À0.69) 0.3671 0.1997 0. the chairpersons themselves get much less pay than their counterparts when their companies sustain an overstaffing problem. .2.96) 0.566à (À1.16) À0.506ÃÃà (7.0722 (1.35) À0. which is not an exact measurement.50 Director Pay2 À10. The abovementioned evidence shows that local SOEs tend to sustain excess employment when their chairmen have a government background.192Ãà (2.513ÃÃà (11.56 (À0.11) 15.04) Director Pay1 7.12) À0.12 À0.482ÃÃà (7.84) À28.04) Director Pay2 À10.18) 1029 0.144Ãà (2. W.352ÃÃà (À2. a chairman who promotes overstaffing may receive more money or greater promotion opportunities as compensation for incurring these negative effects on the firm.824 (À1.66) 0.365ÃÃà (À3.73à (1.13) À0.05) 1029 0.88) Director Pay1 7.493ÃÃà (11.00625ÃÃà (À4.69 7. Xiongyuan. 5. the above results support our prediction that local SOEs are more likely to sustain excess employment when chairmen have a government background.ÃÃà Indicate significance at the 10%.57) 1.58) 1.0612ÃÃà (À5.45) À0.1878 16.493 (0. its chairman does not enjoy an increase in his/her pay.18) 1029 0.73) À0.0770ÃÃà (À4.17) À0.59) 0.

742 (1.18) ÃÃÃ (3) 16.0019 0.74) ÃÃÃ (2) 16.64) À0. This result could possibly indicate that chairmen who practice overstaffing had already been promoted by governments before they were appointed to act as the local SOEs’ chairmen.618Ã (1.64) 0. has a negative coefficient that is significant at the 10% level. The effects of excess employment on local SOEs – firm level Next we test Hypothesis 2B.85) À0.56 8.17) À0.15) À0. 5.384 (À1. Shan / China Journal of Accounting Research 6 (2013) 51–74 63 chairmen’s government backgrounds do not overcome the negative effects of excess employment on their compensation.206 (À0. which means that chairmen have less opportunity for promotion as they grow older. Gov_Political. To study the relationship between excess employment in local SOEs and their chairmen’s promotion in this model. In Table 8. the chairmen tend to gain more compensation at both the absolute and relative levels.27) À0. the chairmen’s age is negatively related to promotion opportunities. Because there may be a dynamic lag in the factors influencing the turnover of firms’ chairmen.28) 0.17) À0.16) À0. .10) À0. which is the primary variable of interest.2038 32. The term Exc_L. to investigate whether local SOEs whose chairmen have government backgrounds receive more bank loans or government grants.0713ÃÃ (À2.29ÃÃÃ (3. Table 7 provides the results.916ÃÃ (2.ÃÃÃ Indicate significance at the 10%.340Ã (1.1830 29.51) 120 0.120 (À1.1918 30.402Ã (À1. The other part of Hypothesis 2A concerns the chairmen’s prospects of promotion.0018 0. Promotion Constant Exc_LtÀ1 Gov_PoliticaltÀ1 Exc_tÀ1 Ã Gov_PoliticaltÀ1 ROAtÀ1 SaleSize SaleGrowth LeveragetÀ1 Age Tenure Observations P-value Pseudo R2 F-value 8.22) À0.292 (À0.0020 0.122 (0.557 (0.27) 0. Xiongyuan. 5% and 1% levels. as shown by the positive coefficients of SaleSize and ROA on DirectorPay1 and DirectorPay2.867Ã (À1.33) 0.09) À0.118 (À1. In local SOEs that have more sales (greater size) and better accounting performance.0762ÃÃ (À2.541 (À1.126 (À1. In the second column of Table 7.81 (3.848 (À1. The results are presented in the first column. it should be emphasized that this sample only includes 120 observations. This finding is also consistent with the promotion trend for younger managers in China.10) À0.11) À0. we introduce only the firms that changed their chairmen between 2004 and 2009.97 (1) 15.545ÃÃ (À2. which may affect the results.44) 120 0. we add Gov_Political and find that there is no significant relationship between the chairmen’s promotions and the firms’ levels of overstaffing. Also.544ÃÃ (À2.0700ÃÃ (À2. W.ÃÃ.79) À0.49) 120 0.635 (1.688 (1.24 (3. ROA and Leverage.W. we introduce the lagged variables of Exc_L. which shows that a policy of overstaffing tends to decrease the chairmen’s promotion opportunities.30) 9. we run the regressions to test the Table 7 Excess employment and chairman’s promotion.03) À0.555ÃÃ (À2. although the sign of the coefficient is negative. (2) Year and industry dummies are included in the regressions but not reported.21) À0. respectively.88) 0. Furthermore. This result is consistent with prior results in this research area.91) À0.3.91 Notes: (1) Ã.

93) À0.07) 0. consistent with the findings of Yu and Pan (2008).298ÃÃÃ (À3.00579 (0.0176ÃÃ (2.90) 0.91) À0.607ÃÃÃ (26.00265ÃÃ (À2.5297 0.64 W.5228 76.00263ÃÃ (À2. given in Table 9. This finding indicates that when the local economy develops well.49) À0.0208ÃÃÃ (À6.48) 1040 0.4.89 (1) 0. We perform OLS regressions to identify government grants that could be influenced by the firms’ excess employment and Table 9 shows the regression results. are similar to those shown in Table 8.302ÃÃÃ (À3.5205 81.12) (2) 0. W.609ÃÃÃ (26.000454 (0.81) À0.52) À0.57 0.99) À0. To provide insight into whether and/or how excess employment. Although the firm’s overstaffing scale is irrelevant to the level of government subsidies. The results. In addition.350ÃÃ (4.00616 (0.86) 0.303ÃÃÃ (À3.ÃÃÃ Indicate significance at the 10%.5297 0. This positive relationship may suggest that firms with more employees attract more government subsidies.92) 0.162ÃÃÃ (8. The government background variable (Gov_Political) is positively related to government subsidies.48) À0.ÃÃ.69) À0.44) (3) 0.0202ÃÃÃ (À5.90) À0.78) À0.49) 1040 0.77) À0.08) 0. 5.14) À0.165ÃÃÃ (9. the actual number of employees (Alsale) is statistically significant and positively related to government grants. Additional analysis The above tests show that governments intervene into local SOEs’ employment decisions by nominating chairmen who have government backgrounds.5224 72. respectively.000223 (À0.02 Notes: (1) Ã. We also find that the regional marketization level (Marindex) is significantly and positively related to government subsidies.0264Ã (À1.08) 0. (2) Year and industry dummies are included in the regressions but not reported.00262ÃÃ (À2. debt financing and government subsidies influence a firm’s labor costs or accounting performance.000388 (0.82) 0. Debt 2 and Debt 3.0288Ã (À1.609ÃÃÃ (26.0288Ã (À1.00581 (0. relationship between debt maturity and excess employment.09) 0. to examine this hypothesis.06) 0.21) 0.000539 (À0. politically connected firms have greater access to debt than firms without political connections. Shan / China Journal of Accounting Research 6 (2013) 51–74 Table 8 Excess employment and local SOEs’ debt financing.351ÃÃÃ (4. the firms in these regions are more likely to receive government subsidies from the local government.0174ÃÃ (2. as expected.98) À0.0208ÃÃÃ (À6.51) 1040 0.352ÃÃÃ (4. we use another two variables. We find that excess employment by firms is not related to the government subsidies those firms receive. we also need to know how these factors influence the firms’ performance. we conduct further analysis in this section. and the relationship is statistically significant.162ÃÃÃ (8. . The results shown in the table indicate that the firms’ levels of overstaffing are not significantly related to the amount of long-term debt the firms receive from banks. Xiongyuan.5270 0. because they help the government with the unemployment rate. However. However. The tests also show the effects of overstaffing problems on firms and on their chairmen. Debt1 Constant Exc_L Gov_Political Exc_L Ã Gov_Political FixedAsset SaleSize SaleGrowth ROA Leverage Audittype ExistAge Observations R2 Adj-R2 F-value 0.87) 0.93) À0. 5% and 1% levels.

0660 0.0108 (À0.00304 (À1.28) 0.07) À0.05 Notes: (1) Ã.0529 5.101Ãà (À1.00292 (1.42 Subsidy2 0.00) À0.86) 0.000678 (À1.00274 (À1. The dependent variable is a continuous variable and we introduce two measurements to proxy for this.27) À0.74) À0.0192 (À0.26) 0. as shown by the significant negative coefficients on Exc_L. Debt1. Although excess employment increases the firms’ total labor costs.59) À2. leverage percentage of ownership by the largest shareholder and age of the firm.0118à (À1. We use ROA and TobinQ to measure the firms’ accounting performance.10) 0.50) 0.474 (0. The independent variables include Exc_L. 5% and 1% levels.0703 0. Shan / China Journal of Accounting Research 6 (2013) 51–74 Table 9 Excess employment and government subsidies. Consistent with the findings of Zeng and Chen (2006).71) Subsidy1 À0.000501 (À0.111Ãà (2.55) À0.0793 0.0115à (À1.00129à (1.01000 (À0.95) 0.0000197 (0.50) À0.113Ãà (2. The control variables (as defined in Appendix A) include the regional macroeconomic variables of GDP per capita and unemployment rate.0186 (À0.25) Subsidy1 À0.0202 (À0.61) 0.0917Ãà (À2.13) 0. log of total sales.00) Subsidy2 0.00102ÃÃà (3.50) À2.” which does harm to the firms’ operations. In these regressions.0738 0. Xiongyuan.0637 5.04) À0. Subsidy1 Constant Exc_L Gov_Political Gov_Political à Exc_L Marindex Alsale SaleSize ROAtÀ1 Leverage FirstShare Unemploy Observations R2 Adj-R2 F-value 0. debt.662ÃÃà (À4.63) 0.ÃÃ.13) À0.17) 0.000349 (À0. The other measurement is Average Labor Cost. a firm’s excess employment decreases its accounting performance.0299à (1.0766 0.15) 1017 0.34) 0.000445 (À0. which is calculated as “cash paid to and on behalf of employees” from the cash-flow statement divided by total sales.497 (0.000869 (1.06) À0.05) À0. subsidies and accounting performance.0159 (À0.000834 (1.47) 0.0113à (À1.10) À0. (2005) and Xue and Bai (2008).73) À0. Subsidy1 and several firm-level variables.87) 0.00103ÃÃà (3. and a number of firm-level variables including the firms’ percentage of fixed assets in relation to total assets.00059ÃÃà (3.06) À0. but the relationship is not . (1) Consistent with the findings of Xu et al.00282 (1.00007ÃÃà (À3.000842 (1.05 0.0590 4.000138 (0.W.93 0.00007ÃÃà (À3.15) À0.07) 1017 0.77) 0.82) 0.32) 1017 0. Table 11 reports the results concerning the relationships between the state owned firms’ excess employment.000472 (À0. The first measurement is Total Labor Cost. Table 10 reports the regression results.87) À0. Year and industry dummies are also included in the regression but not reported.0000226 (0.06) À0.0287à (1. The most important independent variable of interest is the firm’s excess employment (Exc_L).53) À0.31) 0.000345 (À0.93) À0. and negatively related to the average labor costs.000686 (À1.29) 0.16) 65 Subsidy2 0.ÃÃà Indicate significance at the 10%. it also decreases the average salaries that employees receive.96) 0. ROAtÀ1.74 À0.161ÃÃà (2.00301 (À1. W. (2) Year and industry dummies are included in the regressions but not reported.116Ãà (2.0000503 (0.79) 0.26) 0.725ÃÃà (À5.00288 (1.0798 0.0925Ãà (À2.0606Ãà (2.0651 5.36) 1017 0.115Ãà (2.77) À0.10) 1017 0. respectively.31) 1017 0.99) 0. asset growth.98 0.0564 5.00061ÃÃà (3. The results in Table 11 are as follows.507 (0.17) 0. These results confirm that excess employment is a typical result of the government’s “grabbing hand.33) 0.0621Ãà (2.0587Ãà (2. First.00101ÃÃà (3.639ÃÃà (À4. which is calculated as the logarithm of “cash paid to and on behalf of employees” divided by the total number of employees.70) À0. we exclude the compensation and the number of employees who are related to their firm’s chairman.61) À2. sales growth.0294à (1.92) 0. (2) Debt financing is negatively related to firm performance.05) À0. the firms’ scale of overstaffing is significantly and positively related to total labor costs.0655 5.00108à (1.00007ÃÃà (À3.000603ÃÃà (3. we perform regressions to examine the factors that influence the companies’ labor costs.22) À0.02) 0.

In attempting to mitigate this endogeneity issue.82 À0.77 1040 0.77 0.00564Ã À1.94 0.91 1040 0.0286ÃÃÃ À3.40 ÃÃÃ (4) 7.00590ÃÃ À2.52 0.3896 39.99 À0.0290ÃÃÃ À3.0893ÃÃÃ 3.000827Ã 1. Consequently.3897 37.247 0.0141ÃÃÃ À3.4319 43.0288ÃÃÃ À3. (2) Year and industry dummies are included in the regressions but not reported. statistically significant.1. Shan / China Journal of Accounting Research 6 (2013) 51–74 Total labor costs (1) Constant Exc_L Gov_Political Exc_L Ã Gov_Political FixedAsset AssetGrowth SaleGrowth SaleSize ROAtÀ1 Leverage FirstShare ExistAge GDP Unemploy Observations R2 Adj-R2 F-value 0.000904ÃÃ 1.38 À0.40 À0.09 À0.4421 0.35 0.82 À0.92 0. (3) Having chairmen with government backgrounds is positively related to ROA and TobinQ. .0198ÃÃÃ 15.0345ÃÃÃ 4.69 À0.05 À0.0863ÃÃ 2.05 À0. 5.78 0.375ÃÃÃ À3.38 ÃÃÃ (6) 7.5. respectively.203 17.312ÃÃÃ À6.72 À0. we only focus on the political connections of SOE chairmen.03 À0.80 À0.44 À0.03 0.4420 0.0311 À0.0895ÃÃÃ 3.0145 0.61 À0.000329 0. Xiongyuan.4388 0.55 0.ÃÃ.57 0.18 0.85 0. as a rent-seeking process.39 0.14 0.215ÃÃÃ 11.25 0.289ÃÃÃ À16. we perform the following three tests. Specifically.242 0.258 0.192ÃÃÃ 17. government intervention does harm to firms.442 15.13 ÃÃÃ (3) 0.79 À0.81 À0.00229 1.02 0.99 À0. 5% and 1% levels.09 ÃÃÃ (5) 7.30 0.00837ÃÃ À2.4293 45.54 À0.0274 À0.36 À0.61 À0.64 À0.0240 0.05 0.41 ÃÃÃ Average labor costs (2) 0.58 À0. it is possible that the government assigns candidates to firms with excess employment. the negative effects of the government’s “grabbing hand” are obvious and the “helping hand” effect is not so obvious.0171ÃÃÃ À12.95 À0.360ÃÃÃ À3.000313ÃÃÃ 2.440 14.214ÃÃÃ 11.02 À0.65 À0. Robustness tests One concern with our analysis is the potential for reverse causality.63 0.000305ÃÃÃ 2. W.262 0.332ÃÃÃ À2.235 0.21 0. and board members may also have political connections.250ÃÃÃ À3.4006 0. however.0140ÃÃÃ À3. The reason may be that debt financing.00 1040 0.00321 1.0173ÃÃÃ À12.85 0.000319 0.78 À0.00851ÃÃ À2.00820ÃÃ À2.66 Table 10 Tests of labor costs.20 0.5.0199ÃÃÃ 15. In both cases.000320ÃÃÃ 2.57 0. However.78 1040 0.67 1040 0.96 1040 0.95 0. does harm for both the firm and the government.0172ÃÃÃ À12.64 À0.3998 0.0929ÃÃ 2.324ÃÃÃ À2. to account for this type of political connection.000537 0.326ÃÃÃ À2.94 0.92 Notes: (1) Ã. 5.64 À0.64 0.0343ÃÃÃ 4.42 0.00541Ã À1.374ÃÃÃ À3.95 0.60 0.298ÃÃÃ À9.286ÃÃÃ À16.83 0.0235ÃÃÃ 10. To summarize.66 À0.214ÃÃÃ 10.12 0.00578Ã À1. W.71 À0.99 0.317ÃÃ À6.3915 35. and therefore hinders firm performance.99 0. especially CEOs.0904ÃÃÃ 3.02 0.0235 0.313ÃÃÃ À6.ÃÃÃ Indicate significance at the 10%.0340ÃÃÃ 4.70 À0.443 15. but not to a significant degree.4314 41.0315 À0.00231 1.0195 0.37 0.05 À0.05 0. the boards of these firms are often responsible for overseeing managers.53 À0.80 À0.184 17.00248Ã 1.000905ÃÃ 1.0139ÃÃÃ À3.4028 0.238 0.250ÃÃÃ À3.00565Ã 1.48 0.69 0. The government maintains the ultimate authority regarding appointments of CEOs or chairmen in SOEs and may do so according to its own priorities.03 0. Redefining political connections In the previous sections of this paper.245ÃÃÃ À3.

68 0.28 À0.0305ÃÃÃ 6.113ÃÃÃ À7. Boardrate = the number of board directors with political connections/board size.ÃÃÃ indicate significance at the 10%. Xiongyuan. respectively.0487Ã À1. the lower its level of excess employment. W.137 0.446ÃÃÃ À3.0118ÃÃÃ 8.113ÃÃÃ À7.ÃÃ.36 0.0257 0.4825 30.79 0.52 0.00232 0. (2) Year and industry dummies are included in the regression but not reported.05 À0.126ÃÃÃ 5. ROA (1) Constant Exc_L Debt1 Subsidy1 Gov_Political Exc_L Ã Gov_Political Debt1 Ã Gov_Political Subsidy1 Ã Gov_Political FixedAsset AssetGrowth SaleSize SaleGrowth Leverage Observations R2 Adj-R2 F-value À0. The results are tabulated in Table 12.4471 0.87 À0. Redefining political connectedness according to board member or CEO connections cannot substitute for a focus on the chairmen’s political connections in explaining overemployment.39 0. Shan / China Journal of Accounting Research 6 (2013) 51–74 Table 11 Tests of the government’s “Grabbing Hand” and “Helping Hand”.72 0.10 0.0388 0.00331ÃÃ À2.105ÃÃÃ À8.21 À0.0652 À0.0635 À0.0220ÃÃÃ À2.0222 1.72 0.0612 0.06 À0. 5% and 1% levels.89 À0.W.572ÃÃ 2.53 ÃÃÃ (3) 4. Furthermore.65 0.0205ÃÃ À2.00159 À0.81 À0.28 À0. Boardrate1 = the number of board directors with industry-related government background/board size.63 À0.146 À4.26 ÃÃÃ (4) 4.143 À4.35 1040 0. which means that the more politically connected board members a firm has.4246 24.106ÃÃÃ À8.445ÃÃÃ À3.33 1040 0.544 14. the subsample shows that the CEOs’ industry-related political backgrounds are negatively related to excess employment (statistically significant). we also examine the CEO’s political backgrounds.82 À0.00643ÃÃ À2.315 0.0116ÃÃÃ 8.45 1. The results in Tables 12 and 13 confirm that appointing politically connected board directors or CEOs is not the mechanism for the government to solve the employment problem.36 1.96 0. which is a different result from that found in Table 5.886 1.93 0.45 0.82 À0. Table 13 reports the results from the examination of the CEOs’ political connections.55 0.4994 0. We find that there is no significant relationship between the CEOs political connections and overstaffing in their firms.67 1040 0.59 0.24 À0.271ÃÃ 1.0593 À0.28 À0.124ÃÃÃ 5.57 À0.0122 À0.95 0.96 À0.40 0.4429 0.68 À0.4814 27.97 ÃÃÃ 67 TobinQ (2) À0.00118 0.52 À0. and the effect these connections have on firm employment levels.0651 0.47 0.87 À0. The regression results in columns 1 and 2 show that the rate of political connections on boards is negatively related to excess employment.97 À0.0308ÃÃ À2. the results show no significant positive relationship between the proportion of board directors with industry-related political backgrounds and excess employment in their firms.575ÃÃ 2. .0489 À1.0645ÃÃÃ À3.62 1040 0. instead of just focusing on the chairmen’s political backgrounds.31 0.07 0.0522ÃÃÃ À3. when it comes to columns 3 and 4.722 0.4272 22.0394 0.51 0.564ÃÃÃ 14. However.4990 0.0304ÃÃÃ 6.189 0. However.36 Notes: (1) Ã.80 À0. we collect information on board members and rate the members who have political connections as a proxy for political connections according to the following variables.

0207ÃÃÃ (À4.40) À0. Panel B shows the results of employment differences before and after the chairman turnovers in the turnover group.41) À0.79) 0.94) À0.98) 0.93) 0.71) À0.48) Exc_L_Dummy À4.3587 (À1.84) 0. (2) Year and industry dummies are included in the regressions but not reported. respectively.056 9.9066 (1.42) 0.33) 0.049 Notes: (1) Ã.5342ÃÃÃ (8.63) À1.13. To do this. we test the differences before and after a chairman turnover for the turnover group.75) 1.56) À0.0171 (À0.0019 (1.0902ÃÃÃ (À4. In Table 14.1303Ã (À1.1061 (À0.22) À0.1992 (À0.72) 0.4509ÃÃ (2.25) À4.1041 (0.68 W.84) 0.81) 0.0029Ã (1.2046 (À0.2129ÃÃÃ (2.44) À0.07) 0.0396 (0.17) À0. 1%) and the absolute number of employees (Z = À4.11) À0. 5% and 1% levels.6790ÃÃÃ (À4.25) À2.2461Ã (À1.08) 1990 0.4947Ã (À1.5111ÃÃ (À2. we identify exogenous changes in the firms’ chairmen that are not caused by policy reasons.84) 0.2746ÃÃÃ (7.4173ÃÃÃ (À5.2894 (1.039 Exc_L 3.88) 2881 0.0391 (0.0610ÃÃ (À2.02) 0.77) Exc_L_Dummy À5.5.047 6.3371ÃÃÃ (6.98) 0.8553ÃÃÃ (5.0358 (0.0538 (À0.0408ÃÃÃ (3.0112 (0.056 0.5367 (0.2397ÃÃÃ (À7.ÃÃÃ indicate significance at the 10%. We can see that the firms’ excess employment before the chairman turnovers is significantly lower than it is after the turnovers.83) À0. Excess employment around chairman turnover To examine the reverse causality problem more deeply. W.86) 0.17) 0. Panel C of Table 14 shows that both the . we present summary statistics comparing the employment situations of the turnover and the non-turnover groups. Shan / China Journal of Accounting Research 6 (2013) 51–74 Table 12 Board political connections and excess employment.47) À0.30) À0.2.93) 0.29) À0.0607 (À0.ÃÃ.23) À0.06) 0.11) 2881 0. To compare the employment situations of the two groups. according to whether the firms have experienced a chairman turnover during the 2004–2009 period. The cross-sectional mean (median) values of the firms’ employment situations are reported.1858Ã (1. Some 343 cases of chairman turnover appear among the 1500 firm observations.85) 0.1248 (1.1934ÃÃÃ (À3.11) 0.1157 0.0003 (À0.69) À0.85) À0.1065ÃÃÃ (À5.0096 (0. In addition. Xiongyuan.062 0. panel A shows that the level of excess employment (t = À2.28) À0.0909 (À1.49) 1990 0.85.66) À0.02) Exc_L 2.8339ÃÃÃ (À5.28) À2.0312ÃÃÃ (À3.9214 À0.33) 0.2923ÃÃÃ (À6.0111Ã (1.46) 0.3949ÃÃÃ (À4.3691ÃÃÃ (3.77) 0. 1%) in the turnover group are significantly higher than in the non-turnover group.1073 (À0. we divide the total sample into two groups.41) 0.6486 (0.13) À3. We also identify cases among local SOEs in which the previous chairmen were not politically connected and the new chairmen who replaced them had political connections.4860 (1. 5. This is consistent with the previously demonstrated negative relationship between political connections and excess employment.1042 (À1. Excess Employment Constant Boardrate Boardrate1 Govindex Unemploy FixedAsset AssetGrowth SaleSize SaleGrowth ROAtÀ1 Leverage ExistAge Audittype Dual FirstShare Observations R2 Adj-R2 or Pseudo R2 F-value À0.1068ÃÃÃ (À4. as well as the t-statistic and the Wilcoxon values of the difference tests.91) 0.89) À0.0017 (0.0143ÃÃ (1.0163ÃÃ (2.0710ÃÃÃ (4.

(2) Ã.6992ÃÃÃ (À6.0990 (À1.66) 749 0.06) 0.14) 0.and firm-level variables.7102 (À1.0002 (0.45) 0.30) À0.1412ÃÃ (À2.0298 (0.0019 (0.7697 (1. including a regulated industry dummy.0008ÃÃÃ (À4.1567 (À0. Shan / China Journal of Accounting Research 6 (2013) 51–74 Table 13 CEO political background and excess employment.5335ÃÃ (À2. ÃÃÃ Indicate significance at the 10%.0112Ã (1.0068 (1.054 9.46) 0.17) 0. The dependent variable is a dummy variable.27) À0.8138ÃÃÃ (À3.02) 0.2030ÃÃÃ (2.64) À1.3. Similarly.33) 0.55) À0. we test how employment levels change when a chairman with a political background is replaced by a new chairman with such a background. Excess Employment Constant CEO_Political CEO_ Gov_Political Govindex Unemploy FixedAsset AssetGrowth SaleSize SaleGrowth ROAtÀ1 Leverage ExistAge Audittype Dual FirstShare Observations R2 Adj-R2 or Pseudo R2 F-value Exc_L 3.28) À0.6858 (À1. ROA and leverage.86) À0.4772ÃÃ (À2.1149 (1.3132Ã (1. and 0 otherwise.2804ÃÃÃ (7.4333ÃÃÃ (8. the ownership percentage of the largest shareholder.1890Ã (1.3999Ã (À1.25) 0.64) À0.02) 0.073 4.6946ÃÃÃ (2. respectively.0101 (0. (3) Year and industry dummies are also included in the regressions but not reported.6367ÃÃÃ (À4. include regional macroeconomic factors of per capita GDP.26) À2.81) 0.0070 (0.0897 À0.2505ÃÃÃ (À7. respectively. W.12) 749 0.49) 0.26) À0.0419ÃÃÃ (3.4984ÃÃÃ (6. The results (not reported) show no significant difference for employment levels for this type of turnover.2645 (1.0825 (À0.4710ÃÃÃ (À5.0875ÃÃÃ (À4.0602 (À0.78) 0.20) Exc_L_Dummy À4.0050Ã (1.05) À0. The independent variables.02) 0.2094ÃÃ (2.37) 0.0893 (À1. (2007) and Yu and Pan (2008). ÃÃ.5374 (1.63) À0.07) À2.25) Exc_L 2. we control for the following variables. we use a two-stage approach. In the first stage we perform logistic regressions to identify factors that influence the election of politically connected chairmen.41) À0.91) 69 Exc_L_Dummy À9.1891 (À1. overstaffing scale and the staff numbers are statistically and significantly lower after the chairman turnovers. Panel D focuses on the chairmen’s government backgrounds and shows no significant difference in employment levels before or after turnover in this subsample.2465ÃÃÃ (2.68) À0.0214Ã (1. equal to 1 if the chairman is a current or ex-government bureaucrat.060 0.67) À0. .0858ÃÃÃ (3.2503 (À1.14) À3. unemployment rate and process of marketization.40) 0.5647 (À1. as defined in Appendix A.2344ÃÃ (À2.W.73) 0. According to Fan et al.22) À0.5804 À0.096 0.0031ÃÃ (2.94) 0. Determinants of chairmen’s political ties In further attempting to mitigate the endogeneity issue.083 Notes: (1) CEO_Political and CEO_Gov_Political are proxies for CEO’s political connection and government background.48) À0. 5.13) 0.07) 2881 0.59) À0.5.55) 0.0177 (À0.0118 (À0.25) À0.1510ÃÃÃ (À4.4852Ã (À1.86) À0.05) 0.01) 2881 0.7954 (1. Xiongyuan.038 À0.26) 0.0311 (0. and a few industry. 5% and 1% levels.1104ÃÃÃ (À6.32) 0.60) À3.00) 0.69) 0.31) 0.28) À0.1397 (À1.2352ÃÃÃ (À3.02) À0. Year dummies are included in the regression but not reported.

70 W.7923 (0) 4484 (2428) 1.87) À0.000854 (0.49) 0.182ÃÃÃ (6. . (2) Ã.484ÃÃ (À2. ÃÃÃ Indicate significance at the 10%. Panel D Exc_L Staff No. 0. These regression results suggest that when local governments are facing the challenge of meeting economic and employment targets. Political Constant GDP Unemploy Marindex Industry FirstShare ROA Leverage N Pseudo R2 53.12) À0. respectively.3073 (0) 4749 (1951) Non-turnover group 0. respectively.48 (À1.65Ã) T-test À2.18 (2. 5% and 1% levels.04 (0.29) 0.76) 0. Turnover group Panel A Exc_L Staff No.05 (1.396ÃÃÃ (3. they have an incentive to appoint politically connected chairmen.17ÃÃÃ) 1.2138 (0. W.188 (À0.6259 (0) 4493 (2355) Post-turnover Panel B Exc_L Staff No.67ÃÃÃ) 0.3206) 5739 (4202) 0.6) 3.168 (À1. 5% and 1% levels.06) 0.46) 0. Shan / China Journal of Accounting Research 6 (2013) 51–74 Table 14 Univariate tests of employment around chairman turnover. GDP is negatively related and the local unemployment rate is significantly and positively related to the appointment of politically connected chairmen.85ÃÃÃ (À1.94) 0.5169 (0) 4748 (2420) 0. We also find that a local SOE is more likely Table 15 Test of the determinants of chairmen’s political ties.89ÃÃÃ) À0.ÃÃ.197ÃÃ (2.97) 1.03) À1.37ÃÃÃ (2.131 (À1.0457 (0.72) 0. 0.68 (À4.193 (1.126ÃÃÃ (À2.0304 Gov_Political 53.00886ÃÃ (1.13ÃÃÃ) Notes: (1) Staff No. is calculated as the absolute number of the firm’s employees.3299 (0) 2598 (903) 4.195 (À0.20) À0.35) 0.16 (À1.0133 Notes: (1) Ã.5048 (0) 4674 (2022) Pre-turnover 0.32) À1.095 (0.ÃÃÃ Indicate significance at the 10%. Table 15 reports the regression results.81) 2949 0.92 (0.49) 1040 0. (2) Year dummies are included in the regressions but not reported.45) À0.5034 (0) 4500 (2327) 0.14ÃÃÃ (3. Xiongyuan. ÃÃ. Panel C Exc_L Staff No.44) À0.

having a chairman with a government background is positively and significantly (10%) related to excess employment.61) À0.00151 (À0.0744 (0.99) À0.87) 0.60) À2.69) À0.95) À0.ÃÃÃ Indicate significance at the 10%.27) 0.53) 0.81) À0.22) 0.257 (0. We find evidence supporting the argument that appointing chairmen with government backgrounds is the mechanism through which the government intervenes in these firms’ employment decisions.459ÃÃ (À2. Conclusions and limitations This paper explores the influence of government interventions on listed local Chinese SOEs and specifically investigates the affects of interventions to nominate politically connected people as chairmen in SOEs.17) 0. to get a politically connected chairman if the firm is in a regulated industry.187 (À1.W. Shan / China Journal of Accounting Research 6 (2013) 51–74 Table 16 Regression results of two-stage approach.329ÃÃÃ (À4.140Ã (À1. This finding may indicate that firms in regulated industries may need more political connections to help them succeed.ÃÃ.54) À1.75) À0.95) 0. The predicted relationship between politically connected chairmen and excess employment is negative and statistically significant (at 5%).0932 (0.65) À0.0150ÃÃ (2. (1) Constant Political Gov_Political Govindex Unemploy FixedAsset AssetGrowth SaleSize SaleGrowth ROAtÀ1 Leverage ExistAge Audittypee Dual FirstShare Observations Pseudo R2 À0. W.0624Ã (À1. .361ÃÃÃ (2.79) À0.907ÃÃÃ (3. Xiongyuan. we use comprehensive financial and accounting data from 2004 to 2009. In the second stage regression.175 2. together with detailed information on SOE chairmen and macroeconomic data for local regions in China.00498 (À0. As evidence. respectively.0606Ã (À1.1266 Notes: (1) Ã. remain qualitatively similar to previously reported findings.94) 0. As predicted.534ÃÃ (À1. 6.51) 1008 1. we examine the consequences of excess employment on local SOEs.12) 0.47) À0.995ÃÃÃ (6. We study the role of chairmen with government backgrounds in shaping firms’ employment decisions and the effects of overstaffing on both the chairmen’s income and the firms’ operations.929Ã (1.0859ÃÃÃ (À3.0186 (À0.0587 (1. After studying the relationship between excess employment and the chairmen’s government backgrounds.193 (1. 5% and 1% levels.59) À0.141 (À0.91) 0.437 (0.63) À0.137ÃÃÃ (À3.00379ÃÃ (2.904ÃÃ (À2.34) 2855 1.122 (0.76) 71 0.02) (2) 2.90) À0.43) 0.122 (À1. as shown in Table 16. The results of this two-stage approach. (2) Year and industry dummies are included in the regressions but not reported. we use the model from Table 5 but include the first-stage model’s predictions of the probability of politically connected chairmen.

and the positive effects of its “helping hand” are very weak. in Fan et al. Our two-stage approach for mitigating this endogeneity issue continues to provide support for the relationship between excess employment and political connections. This finding indicates that governments tend to compensate firms for helping to reduce the social burden of unemployment. which equals 1 if the regional unemployment rate is above the median Unemploy . Second. The ratio is calculated as (year-end stock price of A shares à number of A shares + year-end stock price of B shares à number of B shares + year-end stock price of H shares à number of H shares + book value of nontransferable shares + total liabilities)/total assets Dummy variable. there is a possibility that SOEs with low efficiency or excessive labor forces are more likely to hire ex-government bureaucrats as chairmen. Also. Prior studies demonstrate that firms with different kinds of ownership tend to operate in different ways. First. Appendix A See Table A1. The data is obtained from the NERI Index of Marketization of China’s provinces. Shan / China Journal of Accounting Research 6 (2013) 51–74 First. Therefore. W. future research should examine central government SOEs and private firms in comparison with the situation of local SOEs. which equals 1 if the auditors issue a modified audit opinion about the financial reports Dummy variable. Additional analysis indicates that the negative effects of the government’s “grabbing hand” are obvious. the support that governments offer firms in return for overstaffing does not significantly improve the firms’ long-term performance. Variable Age AssetGrowth Audittype Dual ExistAge FirstShare FixedAsset GDP Total labor cost Average labor cost Leverage Marindex Mshare ROA SaleGrowth SaleSize Tenure TobinQ Definition Age of the chairman (continuous variable) (Cash paid to acquire fixed assets and intangible assets)/total assets Dummy variable. This analysis has very strong policy implications. the more marketoriented. Xiongyuan. We demonstrate that appointing chairmen is an indirect way for the government to intervene in local SOEs. which equals 1 when the chairman is also the CEO of the company Number of years the firm has existed Percentage of shares owned by the largest immediate shareholder Fixed assets/total assets Dummy variable. Percentage of shares owned by the firm’s management Recurring income/total assets (Total sales in year t – sales in year tÀ1)/sales in year tÀ1 Ln (total sales) Number of years the chairman has spent in the company The sum of the market value of equity and the book value of liabilities divided by total assets. adjusted for nontradable shares. This finding suggests that the government should reduce interference in local SOEs and take more effective measures to improve the positive value of government subsidies. the firms selected in our sample are all local SOEs. The higher the index. contrary to our prediction. but we cannot completely rule out this endogeneity concern. (2010). we find that local SOEs whose chairmen have only general political connections are less likely to hire extra staff than chairmen with a professional background in government. which equals 1 if regional GDP per capita is below the median (Cash paid to and on behalf of employees – the firm’s top three managers’ compensation)/total sales Ln (cash paid to and on behalf of employees/total number of employees) Total liabilities/total assets This is a comprehensive index that captures regional market development. This finding implies that different kinds of political relationships play different roles. Second. This study is subject to the following limitations. excess hiring by firms does not bring much benefit to the chairmen personally. Table A1 Variable definitions. This indicates that government intervention in firms disturbs their normal operations and reduces the efficiency of resource distribution.72 W. but does provide firms with better access to debt financing and government subsidies. This may cause a problem of sample selection and limit the generalizability of the results.

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