Rent Seeking Incentives, Political Connections and Organizational Structure:

Empirical Evidence from Listed Family Firms inChina

Charles J. P. Chen

CityUniversityofHong Kong

Zengquan Li

Shanghai University of Finance & Economics

Xijia Su

CityUniversityofHong Kong

Zheng Sun

Shanghai University of Finance & Economics

Abstract：In this study we examine the incentives for listed family controlled firms inChinato establish political connections and their organizational structure as measured by shareholding structure and composition of board of directors. While issues related to political connections have received increasing attention in academic research recently, our understanding about the effect of political connections on the firm’s organizational structure remains very limited. There is even less documented empirical evidence on political connections in emerging markets where family control is widely spread and it is a dominating institutional factor. We argue that firms have dual objectives in pursuing political connections: to avoid expropriations by the government; and to seek additional benefits in terms of government subsidies and waiver of discretionary charges. We hypothesize and find that listed family firms are more likely to establish political connections when the local markets are less developed and the governments are more powerful in controlling resources. In particular, firms are more likely to build political connections when local governments suffer from severe budgetary deficits, when they tend to rely on discretionary charges and administrative penalties for raising re