This dissertation comprises of three essays. The first essay (Chapter 1) examines the short- and long-term stock market reactions to the Made in China 2025 industrial policy both in China and the United States. The second essay (Chapter 2) investigates the impact of venture capitalist directors on CEO compensation incentives at publicly listed and non-venture backed companies. The last essay (Chapter 3) investigates the impact of political connections on corporate insiders’ trading behavior.

While governments have been practicing varying forms of industrial policy throughout recorded time, especially in eastern Asian countries during the post-WWII period, the evidence on how financial market investors assess government industrial policy announcements is relatively scant. In Chapter 1, we study the link between industrial policy and asset prices by using the Made in China 2025 industrial policy, announced in May 2015, as an external shock. We track Chinese firms and U.S. firms in ten high-tech industries targeted by the policy. In the short run, stock prices, measured by cumulative abnormal returns (CARs), increase significantly for both Chinese and U.S. firms, by 9.9% and 1.4%, respectively. However, in the long run, Chinese firms’ CARs drop heavily, while U.S. firms’ CARs continually increase. We further find that after the policy announcement, Chinese firms’ profitability declines dramatically by an average of 52.9% and firms’ leverage increase significantly, but they do not receive additional government subsidies. We conclude that the policy only boosts market reaction in the short run but does not promote targeted industries longer term.

The value-added role of venture capital on startups has been widely examined. Our understanding is, however, minimal on whether the presence of board members with venture capital experience in publicly listed companies impacts executive compensation contracts. In Chapter 2, we examine the effect of board members with venture capital experience (i.e., VC directors) on executive incentives at non-venture-backed public firms. VC directors serving on the compensation committee are associated with greater CEO risk-taking incentives (i.e., vega) and pay-for-performance sensitivity (i.e., delta). These effects are more substantial if VC directors are from highly reputable VC firms. Using direct flight to VC hub cities indicators and VC dry powder as instruments, we show that these results are causal. In addition, VC directors are more focused on growth performance goals in CEO compensation contracts. We also document that prior finding of greater research intensity and innovation when VC directors serve on boards of public firms is partly explained by increased risk-taking incentives of the CEO instilled by such directors. Lastly, we find that having VC directors on nominating and/or governance committees is associated with a higher likelihood of forced CEO turnover.

The impact of political connections on firm value has been widely examined. However, there is not much evidence on how political connections affect corporate insider behaviors, especially insider stock transactions. In Chapter 3, I study the impact of political connections on corporate insiders’ trading behavior using corporate insiders’ employment data. I find that purchases (sales) by politically connected corporate insiders are associated with lower (higher) abnormal returns compared with non-politically connected insiders, indicating that politically connected insiders in general are cautious about potential legal risk. This effect is more significant among purchases. I also find that politically connected insiders are more likely to have longer trading horizons and are more likely to make routine trades. The Stop Trading on Congressional Knowledge (STOCK) Act passed in April 2012 effectively decreases (increases) the abnormal returns associated with insider purchases (sales) made by Congress members and staff in short horizons.