How ideologies influence the legitimacy of state involvement in corporate governance

Abstract

The Central Government of China is the largest controlling owner of many publicly traded Chinese firms and the CEOs of many Chinese firms are former officials with the Central Government. This study explores how these forms of state involvement in corporate governance are perceived by foreign investors. I posit that the legitimacy of state involvement is influenced by the dominant ideology in the foreign capital market. I tested hypotheses using a sample of Chinese listed firms which are cross-listed on the United States and the Hong Kong stock markets, two markets with very different ideologies about the role of government. My findings show that central government ownership positively affects legitimacy among Hong Kong investors and negatively affects legitimacy among United States investors. Surprisingly, I found that CEO political connections with the central government have a positive effect on legitimacy in both markets.