Political Connection, Diversification and Firm Valuation: Evidence from family-owned firms in China

This paper investigates the relationship between political connections, diversification and firm valuation in the family-owned firms in China. The lack of well developed capital market coupled with under-developed regulations may make family-owned firms use market-substitute mechanisms, such as political connections, to expand into new industries whenever economic opportunities appear to beckon. In a sample of 1765 family-owned firms in China, firms with more political connections are more likely to diversify. In addition, political connection may help firms to enter governance-controlled areas easier. Moreover, firms with political-connections perform better than those without political-connections. Overall, the results illustrate that political-connections may help family-owned firms to improve their valuation.