Political Tie Heterogeneity and the Impact of Adverse Shocks on Firm Value

• Published date: 01 December 2015
• Author: Mike Wright,Kamel Mellahi,Pei Sun,Haoping Xu
• DOI: http://doi.org/10.1111/joms.12165
• Date: 01 December 2015

Political Tie Heterogeneity and the Impact of Adverse

Shocks on Firm Value

Pei Sun, Kamel Mellahi, Mike Wright and Haoping Xu

Fudan University; University of Warwick; Imperial College Business School; Fudan University

ABSTRACT Past research has recognized the contingent value of corporate political ties but

largely neglects their heterogeneity. Drawing on the political embeddedness perspective and

literature on emerging economy political institutions, we develop hypotheses regarding how

political networks comprising managerial and government ownership ties may have different

valuation effects in the face of adverse political shocks. Examining stock market responses to

an unanticipated, high-profile political event in China, we find a negative valuation effect of

managerial ties to municipal government, but an insignificant effect of government ownership

ties. Further, companies combining managerial and ownership ties experienced less post-shock

reduction in market value than those holding only managerial political ties. These findings

shed light on the values of different configurations of corporate political ties and inform firms

of potential ways to manage ubiquitous political hazards in emerging economies.

Keywords: China, emerging economies, network embeddedness, political risk, political tie,

tie heterogeneity

INTRODUCTION

Corporate political ties encompass a wide range of individual and institutional linkages

between firms and public authorities (Okhmatovskiy, 2010; Sun et al., 2012). There is

broad consensus in the literature that these ties can translate into higher profitability

and market valuation (e.g., Hillman, 2005; Hillman et al., 1999). Yet prior research has

also documented a darker side whereby politically connected firms suffer a substantial

loss of firm value upon political shocks that cause a sudden removal of the power bases

to which these ties were initially attached (e.g., Fisman, 2001; Siegel, 2007). Given such

contingency of corporate political ties, an important and theoretically intriguing ques-

tion has so far received little scrutiny: Are all politically connected firms equally vulnera-

ble to adverse shocks?

Address for reprints: Mike Wright, Imperial College Business School, Imperial College London, South

Kensington Campus, London SW7 2AZ, UK (mike.wright@imperial.ac.uk).

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C2015 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 52:8 December 2015

doi: 10.1111/joms.12165

This question is of particular relevance to firms operating in emerging markets. On

the one hand, political ties may confer substantial returns to focal firms: Firms need

political connections to guard against government extortions and obtain financial and

regulatory resources at the government’s disposal (Fang et al., 2015; Shi et al., 2014;

Wright et al., 2005; Xu and Meyer, 2013). On the other hand, emerging economies are

characterized by considerable sociopolitical pluralism and volatility, such that a variety

of interest groups and factions compete for political and economic benefits (Henisz and

Zelner, 2010; Kozhikode and Li, 2012). When erratic political rivalry leads opponents

to dominate the political process, firms linked with the incumbent political group are at

considerable risk of suffering from ‘negative cascades of discrimination, resource exclu-

sion, and even expropriation and sabotage’ (Siegel, 2007, p. 625).

We address this risk-return duality by contending that not all politically connected

firms are equally vulnerable to adverse political shocks, for they are typically embedded

in a variety of ties to political actors and institutions. We draw on the political embedd-

edness perspective (Michelson, 2007; Okhmatovskiy, 2010; Sun et al., 2010a) to show

that, in the presence of political hazards in emerging economies, different types and

combinations of political ties vary in their vulnerability and resilience to negative shocks,

which generate different valuation impacts for focal firms. This variance stems in turn

from distinct exchange processes and mechanisms underlying different political tie

compositions. Specifically, we develop and test hypotheses delineating how specific com-

positions of political ties are associated with different valuation impacts arising from

exogenous political events.

Most previous literature focused on a single type of dyadic ties between firms and gov-

ernments. These ties range from personal-level linkages (Hillman et al., 1999; Peng and

Luo, 2000) to organizational-level connections such as government ownership ties

(Inoue et al., 2013; Li et al., 2009). We operationalize the personal-level investigation by

focusing on managerial political ties involving political agents serving on top manage-

ment teams (TMTs) and corporate boards. Comparatively less attention has been paid

to the organizational linkages to political institutions. If firms are embedded in a particu-

lar political network, interorganizational connections can develop in the form of minor-

ity ownership stakes to state-owned enterprises (SOEs) or government agencies. These

business-government ties may be deliberately created by government investment in pri-

vate businesses or stem from residual government shareholdings after privatization

(Inoue et al., 2013; Sun et al., 2010b; Vaaler and Schrage, 2009; Xu et al., 2014). No

matter whether the formation of such ties is of a strategic nature or not, we know little

about if and how adverse shocks affect firms holding government ownership ties

(Perez-Nordtvedt et al., 2014).

Finally, there is emerging evidence that firms may hold a portfolio of personal and

organizational ties with political groups (e.g., Dieleman and Boddewyn, 2012; Zhu and

Chung, 2014). However, literature explicitly studying the differences and interplay

between managerial political ties and organizational ties through government ownership

is lacking. As elaborated below, these two types of ties are not synonymous, in that the

underlying mechanism regulating the exchange relations between firms and political

actors (i.e., managerial political ties) is different from those between firms and political

institutions (i.e., government ownership ties). As such, it remains unclear whether

1037Political Tie Heterogeneity and Adverse Shock Impacts

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C2015 John Wiley & Sons Ltd and Society for the Advancement of Management Studies