Finance and Ideology: The Firm-Level Channels

We investigate how politicians’ ideologies affect economic outcomes and financial development through firm-level channels.

We explore a unique setting of ideological change in China from Mao’s ideology to Deng’s around 1978. Those who were at least 18 years old in 1978 and had joined the Chinese Communist Party are more likely to have adopted Mao’s ideology, and those who did not join by 1978, due to age limit, but joined soon thereafter were more likely to have adopted Deng’s ideology.

This ideological discontinuity has an enduring effect on contemporary firm and city policies. Firms governed by “Mao’s mayors” make more social contributions, have lower pay inequality, and pursue less internationalization than those governed by Deng’s. Selection bias and endogenous matching unlikely explain these results. Corporate political connections, government subsidies, and the state ownership are plausible mechanisms.