Abstract

In this paper, we examine whether political connections can influence the performance of publicly traded Chinese firms. Specifically, we focus on so-called special status (ST) warnings that are imposed on firms after two consecutive years of losses, as well as the likelihood of being accused of fraud by the China Securities Regulatory Commission (CSRC). Our results show that political connections can help reduce a firm’s risk of receiving an ST warning and can even increase its probability of reverting back to normal trading status. In addition, we find that politically linked enterprises are more likely to be accused of fraud. Our results highlight the importance of political connections in business activities and shed light on the potential dark side of this form of external support. While firms can greatly benefit from their relationship with the government, it does not necessarily mean that connected companies enjoy healthy operations or promising future development. These firms may more easily survive in troubles and recover after periods of negative earnings, but they also exhibit a greater likelihood of financial misconduct and/or related government investigations.