In the run-up to their promotion, secretaries of municipal committees of the Communist Party of China will push local companies to merge, as a means to gain political capital, yet such mergers induced by political factors typically result in a deterioration of the companies’ performance, according to a study recently published by the Chinese-language journal
Economics Information.
Mergers and acquisitions (M&A) of companies affect the local economic situation, fiscal revenue and employment, so local governments and officials are highly motivated to intervene, wrote associate professor Yang Shuai, of the Business School of Liaoning University, and the study’s lead author, along with two other authors. If a municipal party secretary, the top official of a municipality in China, is preparing for promotion, the chances of an announcement and completion of company mergers in that municipality increase by as much as 25.78 percent, said Yang.
Although such mergers have a higher return on assets within the first year, the study found, the return over the following three years is less than that of merger deals that happened for non-political reasons. It further demonstrates that the purpose for officials to push M&A is not about improving company performance, but their own personal careers, the authors claimed.
They proposed that local officials should be supervised throughout their involvement with the mergers and held accountable throughout their career when the mergers incur huge losses. The purpose is to prevent mergers from being struck for immediate gains – political capital – for local officials, they said.
A more scientific official assessment system should be established, which gives greater weight to sustainable growth and the improvement of living standards, making officials less motivated to push through mergers. They argued that enterprises must follow what the market rules dictate and take their own needs and long-term development into consideration.
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