Zhi Wang

This dissertation aims to investigate how political embeddedness influences firms’ strategies such as financial and non-financial reporting and internationalization. I have identified whether and how political embeddedness (i.e., government ownership and political connections, both at the central and the local level) affects corporate reporting strategies, particularly in light of the recent policy changes regarding the financial and non-financial reporting of firms in China. In addition, considering the recent government programs that were introduced to facilitate Chinese IFDI and OFDI, I have investigated the effect of political embeddedness on Chinese firms’ internationalization strategies as well. Specifically, Chapters 2-4 examine the influence of political embeddedness on firms’ use of earnings management, CSR reporting, and the propensity to internationalize, respectively.

Chapter 2 examines whether and how different types and levels of political embeddedness influence the quality of financial reporting in China. This was accomplished by investigating how central and local levels of government ownership and political connections influence the choices of the earnings management strategies of the listed Chinese firms. Using a panel data set of 5,531 publicly traded firms in China, for the years 2009–2013, the results of Chapter 2 demonstrate that government-owned firms, and central government-owned firms in particular, are more likely to substitute accrual-based earnings management with costlier, albeit less detectable, real earnings management strategies than non-government-owned firms. The results of this chapter additionally indicate that, compared to firms without political connections, firms with political connections are more likely to resort to less detectable real earnings management strategies. Although to a lesser extent, these firms are also more likely to increase the use of accrual-based earnings management, indicating a relative substitution effect. The results indicate that, by affecting the trade-off between accrual-based and real earnings management strategies disparately, different types and levels of political embeddedness influence firms’ choices of earnings management strategies, and thus the earnings quality.

By examining whether and how political embeddedness influences the diffusion of corporate social responsibility (CSR) practices in China, Chapter 3 reveals the relationship between political embeddedness and the quality of corporate non-financial information. Specifically, this chapter investigates how government ownership and political connections influence the listed Chinese firms’ likelihood of issuing CSR reports. It also examines the underlying CSR performance (CSRP) and its relationship with the firms’ financial performance (CFP). Using the panel data of 15,419 publicly traded firm-year observations in China for the years 2008–2014, the results of this chapter demonstrate that politically embedded firms, particularly firms that are centrally politically embedded, are more likely to issue CSR reports than firms without political embeddedness. The results of this chapter additionally indicate that politically embedded firms, on average, have a higher CSRP than non-politically embedded firms. In addition, the results indicate that, for politically embedded firms, CSRP is more negatively related with financial performance than for firms without political embeddedness. This indicates that political embeddedness also affects the trade-off between CFP and CSRP. This chapter thus provides the first evidence not only on the effectiveness of government-induced CSR policies, but also on their efficiency (i.e., the potential opportunity costs that they imply). The results also demonstrate that different types and levels of political embeddedness play significant, albeit different, roles in explaining the CSR-related practices of firms.

Cross-border M&As are a dominant form of FDI and linked closely to internationalization strategies. Since cross-border M&As are government-supported investment activities, it is important to identify the roles that political embeddedness play in influencing firms’ internationalization strategies with regard to the government’s relevant policy changes. Chapter 4 is dedicated to responding to this call and investigating whether and how political embeddedness influences firms’ propensity for conducting cross-border M&As and their success in China. I contend that institutional constraints, and consequential resource allocation and industry traits influence both politically embedded enterprises and firms without political embeddedness. Therefore, building on prior theories over international business, I developed a theoretical Chinese specific “strategy tripod” framework centered on an institution-based perspective and incorporating resource- and industry-based views. Using a panel data set with 30,314 firm-year observations of publicly traded firms in China from 2000 to 2015, the results demonstrate that state-owned enterprises (SOEs) conduct fewer cross-border M&As than non-SOEs. Compared with non-SOEs, SOEs benefit less from MCA activities. The level of government ownership matters, in that central SOEs conduct more cross-border M&As and benefit more from MCA activities than local SOEs. The results additionally indicate that political connections do not play a significant role in explaining a firm’s propensity for conducting cross-border M&As or MCA success. The findings in Chapter 4 indicate that different types and levels of political embeddedness in China influence firms’ propensity for conducting cross-border M&As and MCA success differently.