Government officials' political incentives and corporate diversification in an emerging economy

Abstract

The current literature on how state affects corporates has focused on either the regulative and normative pressures or the informal relationships between government officials and corporate executives. I propose a framework to view corporate strategies as influenced by the state’s autonomous goals and political incentives of government officials. I test this framework in the context of Chinese publicly listed firms’ diversification strategy. Results suggest that firms diversify into new industries in order to help government officials to absorb laid-off workers from bankrupted state-owned enterprises, especially when local government officials are near the end of their political terms or have longer tenure. Furthermore, politically connected firms are more likely to work with officials to address the state’s agenda on social stability.