Windfalls of emperors' sojourns: Stock market reactions to Chinese firms hosting high‐ranking government officials
| Author | Douglas A. Schuler,Robert E. Hoskisson,Tao Chen,Wei Shi |
| DOI | http://doi.org/10.1002/smj.2622 |
| Published date | 01 August 2017 |
| Date | 01 August 2017 |
Strategic Management Journal
Strat. Mgmt. J.,38: 1668–1687 (2017)
Published online EarlyView 30 January 2017 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2622
Received 12 May 2014;Final revision received7 October 2016
WINDFALLS OF EMPERORS’ SOJOURNS: STOCK
MARKET REACTIONS TO CHINESE FIRMS HOSTING
HIGH-RANKING GOVERNMENT OFFICIALS
DOUGLAS A. SCHULER,1*WEI SHI,2ROBERT E. HOSKISSON,1
and TAO CHEN3
1Jesse H. Jones Graduate School of Business, Rice University, Houston, Texas,
U.S.A.
2Kelley School of Business, Indiana University, Indianapolis, Indiana, U.S.A.
3Nanyang Business School, Nanyang Technological University, Singapore,
Singapore
Research summary: Wecontribute to the corporate political activity (CPA) literature by showing
that investors value companies that host visits of high-ranking government ofcials (President
and Premier). Weargue that investors may value host ofcial visits for two reasons: (1) the signal
received about possibility of rm accessing government-controlled resources via promotion or
protection; and (2) the certication effect from such high-powered visitors elevating the rm’s
reputation and legitimacy. Results from an event study analysis of 84 high-ranking government
ofcial visits in China from 2003 to 2011 indicate that investorsresponded positively to host rms
as reected by stock market performance. Furthermore, the greatest positive reactions accrued
to rms experiencing weaker prior period nancial performance and to rms that are privately
compared to state-controlled.
Managerial summary: Do visits by high-ranking government ofcials inuence rm stock market
performance? Studying a sample of Chinese public rms that hosted 84 visits by the Chinese
President and the Premier from 2003 to 2011, we nd that investors reacted positively to such
visits compared with a group of non-host rms from the same industry and with similar nancial
performance and size. In addition, rms with weaker prior nancial performance and private rms
benet the most from hosting such visits. Our ndings imply that hosting visits of high-ranking
government ofcials can signal future government-controlled resource inows and boost host
rms’ reputation and legitimacy. Copyright © 2016 John Wiley & Sons, Ltd.
INTRODUCTION
Most of the corporate political activity (CPA) lit-
erature assumes that senior managers make con-
scious decisions to enter their companies into the
Keywords: corporate political activity; hosting site vis-
its of government ofcials; business-government relations
China; signaling about government; resources; certica-
tion effect
*Correspondence to: Douglas A. Schuler,Jesse H. Jones Graduate
School of Business, Rice University,Houston, TX, U.S.A. E-mail:
schuler@rice.edu
Copyright © 2016 John Wiley & Sons, Ltd.
policy arena (Hillman and Hitt, 1999; Hillman,
Keim, and Schuler, 2004; Lux, Crook, and Woehr,
2011). Companies may choose to negotiate directly
with government ofcials, such as through lobby-
ing, to attempt to shape the public policies to com-
plement their own assets and capabilities (Oliver
and Holzinger, 2008), support business strategies
(Holburn and Vanden Bergh, 2013), and to pur-
sue advantages over rivals (Bonardi, Holburn, and
Vanden Bergh, 2006). Firms may decide to use
CPA to maintain organizationaleffectiveness (Pfef-
fer and Salancik, 1978) when facing uncertainties
High-Ranking Ofcials Visits and Stock Market Reactions 1669
about access to government-controlled resources
such as contracts and subsidies, and to mitigate
the effects of burdensome regulations (Birnbaum,
1985; Fremeth and Richter, 2011). Firms may opt
to practice CPA to cultivate good relations and trust
with government ofcials, which might pay off in
the future (Milyo, 2014; Mizruchi, 1992). The com-
mon assumption across these perspectives about
CPA is one of strategic choices: When operating in
jurisdictions with strong formal institutions (North,
1990), many rms will consciously engage govern-
ment ofcials positioned to craft rules and direct
resources that might benet them.
This study examines one form of CPA in which
the choice of engagement is less clearly unidi-
rectional: the practice of rms hosting visits of
senior-level central government ofcials. We argue
that visits represent an emergent CPA strategy
(Mintzberg and Waters, 1985), where a conuence
of rm political activities practiced over time and
across levels of government positions the rm to
receive a visit. This new focus contributes to the
CPA literature because it does notrepresent a delib-
erate effort to inuence politicians, seek subsidies,
or pursue regulatory change, but pertains instead to
an activity that ows from pre-existingrelationships
(Hillman and Hitt, 1999) between the rm’s man-
agers and the government ofcials. For such visits,
the relationships between rms’ managers and gov-
ernment ofcials (and their staffs) are complex in
that the rm generally has relationships with gov-
ernment ofcials from different levels of the gov-
ernment (i.e., local governments and local chapters
of the political party) that pre-date the visit of the
higher ranking ofcial. Thus, while the consensus of
the experts is that this particular form of CPA—the
visit— is ultimately requested on the rm by senior
government ofcials, it is unlikely that the invita-
tion is offered without prior relationships between
the rm’s managers and ofcials at some levels of
government.
For this study, we seek to understand whether
third-party investors value the rms’ hosting visits,
and if so, what information might visits conveysuch
that investors bid up the host rms’ stock prices.
Starting from the assumption that third parties
face information asymmetry (Connelly et al., 2011;
Spence, 1973) about certain aspects of the rm that
creates uncertainty about the rm’s future value, the
visit offers information to such third parties. First,
the visit might signal the resources that the govern-
ment is able to direct in the future to the visited rm
or its sector.Government-controlled resources, such
as subsidies, taxes, and regulations, might be pro-
motional in nature, aimed at promoting the rm’s
products or services in domestic or international
markets or protectionist, aimed at shielding weak
rms or rms in distressed sectors from market con-
ditions. Second, the visit might act as a form of
certication (Shane and Foo, 1999) by government
ofcials about the company,in which the host rm’s
interaction with the President or the Premier— both
high status exchange partners— elevates the rm’s
reputation (Rindova et al., 2005) and legitimacy
(Deephouse and Carter, 2005). Both of these path-
ways also assume that high-ranking government
ofcials desire to visit companies with commercial
activities congruent with their preferred public poli-
cies.
The context of our study, China, is particularly
relevant to investigate the inuence of high-level
ofcial visits on rm evaluation by investors.
Specically, we focus on the stock market effects
of Chinese companies that hosted visits of the two
senior-most central government of China, President
Hu Jintao and Premier Wen Jiabao, during the
period 2003– 2011. Both collectively possessed
enormous substantive and symbolic power through
their positions as head of state and head of the
government and as primary leaders (i.e., General
Secretary, Politburo members) of the Chinese
Communist Party (CCP) (Kuhn, 2002). The visits
of high-ranking ofcials may result in offers of
general praise and support about the economy
or the sector, a collective outcome. For example,
during a visit to several high tech companies and
industrial parks in Shanghai in January of 2010,
President Hu in a public speech emphasized the
importance of research as a driver of sound and
fast economic growth and social development
(China View, 2010). Yet, visits may also signal
the importance of only the host rm. For example,
during his 2008 visit, Premier Wen publicly praised
Baosteel’s R&D activities and product advances
in its silicon steel products (Baosteel, 2008), a
high-prole endorsement for the company from an
industry lagging behind its international rivals in
product quality and production efciency (Ernst
& Young, 2013). Though it may lag important
global competitors, the rm provides necessary
employment opportunities. In a country where
the capital market is less developed and public
rms’ disclosure is lacking, hosting visits may
help investors reduce information asymmetry and
Copyright © 2016 John Wiley & Sons, Ltd. Strat. Mgmt. J.,38: 1668–1687 (2017)
DOI: 10.1002/smj
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