Move to Success? Headquarters Relocation, Political Favouritism, and Corporate Performance

Professor at Department of Economics, Fudan University.

Prof. Shuo Chen's CV: Upload/File/2018/3/20180315033324419.pdf

This paper examines the impact of corporate headquarters (HQ) relocation on firms’ performance by applying Difference-in-Differences (DID) analysis on China’s listed companies. We investigate the HQ relocations of two different motivations, distinguished by different destinations: relocations to the capital city of Beijing in search of political favouritism, and relocations to Shanghai or Shenzhen seeking for a strengthened market competitiveness. Specifically, firms that relocate their headquarters to Beijing seem to receive certain political favour, while firms that relocate to Shanghai or Shenzhen have experienced no such impact. Empirical results show that the HQ relocations, motivated by political and market reasons alike, would generally improve the firm’s accounting performance. The improvement in the stock performance, however, only occurs to firms that relocated their headquarters to Shanghai or Shenzhen. The differences in the stock performance might be attributed to the harm of the political favouritism to firms’ sustainability: HQ relocation to Beijing reduces efficiency (TFP) and innovation (R&D and patents). Moreover, we also find that HQ relocations to Beijing generate negative externalities to the rival firms and to the entire industry. These findings show that political favouritism distorts the spatial distribution of economic activities and leads to an inefficient resource allocation.