Published online by Cambridge University Press: 15 September 2017
We examine whether engagement in rent-seeking improves firm value in China. Rent-seeking is defined as a firm's use of resources to establish a relationship with the government to obtain government-controlled resources. We incorporate political rents and associated costs into an analytical framework to examine the relationship between rent-seeking and firm value. Using a sample of non-state-owned firms listed on the Shenzhen Stock Exchange and the Shanghai Stock Exchange from 2007 to 2013, we find evidence of the presence of political rents in the form of government subsidies and evidence of associated costs in the forms of corporate philanthropy and excess management remuneration, which largely explains the insignificant relationship found between rent-seeking and firm value. Our further analysis shows that rent-seeking behavior of firms reduces production efficiency, providing additional evidence to support our thesis that engagement in rent-seeking does not enhance firm value in the Chinese context. In an economy with weak institutions, in particular with weak protection for shareholders, managers and politicians can become rent-seekers and take a considerable share of the economic benefits derived from rent-seeking.
Funding: This work was supported by the National Natural Science Foundation of China under Grants 71502174; the National Social Science Foundation of China under Grants 16ZZD049; and Research Center of Low Carbon Economy for Guangzhou Region.