TY - JOUR AU - Fan,Joseph P.H. AU - Huang,Jun AU - Morck,Randall AU - Yeung,Bernard TI - Vertical Integration, Institutional Determinants and Impact: Evidence from China JF - National Bureau of Economic Research Working Paper Series VL - No. 14650 PY - 2009 Y2 - January 2009 UR - http://www.nber.org/papers/w14650 L1 - http://www.nber.org/papers/w14650.pdf N1 - Author contact info: Joseph Fan School of Accountancy Chinese University of Hong Kong Shatin, N.T. Hong Kong SAR Tel: (852) 2609 7839 Fax: (852) 2603 5114 E-Mail: pjfan@cuhk.edu.hk Jun Huang School of Accountancy Shanghai University of Finance & Economics No. 777, Guoding Road Shanghai Tel: 86-21-65904822 Fax: 86-21-65112195 E-Mail: sufehuang@gmail.com Randall Morck Faculty of Business University of Alberta Edmonton, AB T6G 2R6 CANADA Tel: 780/492-5683 Fax: 780/492-3325 E-Mail: randall.morck@ualberta.ca Bernard Yeung National University of Singapore Mochtar Riady Building 15 Kent Ridge Drive BIZ 1, Level 6, #6-19 Singapore 119245 Tel: +65 6516 3075 Fax: +65 6779 1365 E-Mail: bizdean@nus.edu.sg AB - Where legal systems and market forces enforce contracts inadequately, vertical integration can circumvent these transaction difficulties. But, such environments often also feature highly interventionist government, and even corruption. Vertical integration might then enhance returns to political rent-seeking aimed at securing and extending market power. Thus, where political rent seeking is minimal, vertical integration should add to firm value and economy performance; but where political rent seeking is substantial, firm value might rise as economy performance decays. China offers a suitable background for empirical examination of these issues because her legal and market institutions are generally weak, but nonetheless exhibit substantial province-level variation. Vertical integration is more common where legal institutions are weaker and where regional governments are of lower quality or more interventionist. In such provinces, firms led by insiders with political connections are more likely to be vertically integrated. Vertical integration is negatively associated with firm value if the top corporate insider is politically connected, but weakly positively associated with public share valuations if the politically connected firm is independently audited. Finally, provinces whose vertical integrated firms tend to have politically unconnected CEOs exhibit elevated per capita GDP growth, while provinces whose vertically integrated firms tend to have political insiders as CEOs exhibit depressed per capita GDP growth. ER -