Political Networks and Stock Price Comovement: Evidence from Network-Connected Firms in China

Abstract

In this paper, we examine whether comovement in the stock prices of pairs of Chinese firms connected to the same political network are systematically shaped by the prevailing coordination vs. competition incentives of that network’s politicians. We find strong evidence from 2000 to 2012 (Jiang’s and Hu’s regimes) that stock price comovement is affected by the embeddedness of the firm-politician ties within the network. Among pairs of firms connected to a network through a common politician, we document an increase in stock price comovement. For those pairs of firms connected to a common network via separate politicians (rather than a common politician), we document a relative decrease in stock price comovement. This negative effect suggests that politicians’ relationships within these political networks are generally adversarial rather than cooperative in nature. These results become significantly weaker during Xi’s regime from 2013 to 2017, suggesting that Xi’s anti-corruption campaign and SOE reforms may have attenuated these political network effects on the firms. Our additional tests also show that stock price comovement becomes even more positive (negative) in settings which are expected to increase the coordination or decrease the competition (decrease the coordination or increase the competition) of the politicians.

China's Financial System and Economy: A Review

“…We emphasize that this review article does not aim to cover the complete literature on China's financial system. Political risk and corruption are two particular areas receiving significant attention but are not specifically covered here (see Lin et al 2016, Liu et al 2017, Piotroski et al 2022). We also have not covered the interaction between local government incentives and financial markets (Xiong 2018) as well as China's real estate market [see Song & Xiong's (2018) and Liu & Xiong's (2019) excellent reviews].…”