Political Leadership and Governance Structure Yifan Zhou Job Market Paper First Version: September 8, 2019 This Version: October 20, 2020 Abstract This paper examines how changes in local political leadership affects firms’ governance structure. Using a novel dataset, I document that following the appointment of a new city-level Chinese Communist Party (CCP) secretary, local firms increase the fraction of directors who share a common birthplace with the appointee. This appears to be a channel through which Chinese firms establish political connections. Firms with a higher percentage of birthplace-connected directors exhibit higher abnormal returns around sec- retary appointments. These firms enjoy superior accounting performances and attract institutional fund flows. I reject an alternative hypothesis that these directors are ap- pointed to company boards on the "orders" of the politician, rather than actively recruited by firms. Evidence suggest that firms do not consider the sharing of a common jiguan (ancestral home) to be a valid form of political connection. JEL Classification: P26, D7, G1, G3 Keywords: Political connection, China, institutional fund flow, board of directors Department of Finance, Faculty of Business and Economics, University of Melbourne. Email:
[email protected]. I thank Renée Adams, Ali Akyol, Ryan Anderson, Travers Child, Nadia Massoud, Lyndon Moore, Shang-Jin Wei, Frank Yu, and seminar participants at China Europe International Business School (CEIBS) and the University of Melbourne for their helpful comments. A previous version of this paper was titled Political Connections Through Common Birthplaces. 1 Introduction US President Donald Trump’s collection of remarks since the beginning of the China- US trade war is a sobering reminder of the seismic effects politics has on the private sector.