Political Economy; Diversification in Chinese Firms; Market Transition
The authors develop a theory of how state officials’ political incentives can affect corporate behavior.In the pursuit of multiple goals, such as social stability and economic development, the state designs criteria to evaluate its officials’ performance. Those officials may be motivated to prioritize different goals at different stages of their careers and to mobilize firms to help them achieve those goals.The authors test their theory in the context of Chinese publicly listed firms' diversification between 2001 and 2011, when the state faced economic and social ramifications of bankrupt state-owned enterprises (SOEs) laying off large numbers of workers.The authors' results show that when large layoffs occurred, some firms diversified into industries unrelated to their core business by acquiring bankrupt SOEs and reemploying their workers. This was more likely to occur when the governor of the firm’s home province was closer to retirement, as social stability was more important than economic development for the retiring governor’s career objective.The effect of career stage was weaker for Communist Party leaders, who more consistently prioritized social stability, and when a provincial state experienced intense collective actions that made social stability a stronger immediate focus. The effect was strengthened for firms more vulnerable to officials’ influence, such as those with a strong socialist imprint and those dependent on government resources.The authors' study extends the Weberian state literature and the political economy research on incentives, and it offers a political explanation for corporate diversification in a major transitional economy.