Betting on a Princeling

While previous studies on political connections have empirically estimated the effects of connections on firm value, we still know relatively little about how political connections are formed, or about how the formation of political connections affects the way politicians influence firms. I address these two questions by examining recent cases in China in which two powerful politicians—Bo Xilai and Chen Liangyu—were removed from office. I show that Bo’s removal only affected nationally connected firms, while Chen’s fall only affected locally connected firms. I argue that this difference should be explained by their different career paths: Bo was a national politician, whereas Chen spent his whole career in local government. There is strong evidence that firms were betting on Bo and hence lost market value after his fall. These findings have important implications for our understanding of state-business relations in developing countries.