Political Uncertainty and Corporate Investment: Evidence from the Chinese Private Companies

China's political system has continued to maintain a highly centralized regime despite embracing a decentralized development strategy after the 1979 economic reform. The central government frequently makes changes in political leadership to control regional governments. Such political turnover in the regional governments can generate substantial political uncertainty, which affects the overall management direction and environment of Chinese public enterprises. This study analyzes the impact of replacing city-level party secretaries (CPS) on corporate investment in 228 municipal cities in China. Political appointees can replace city-level party secretaries from within and outside the city or from higher levels of the government. Our empirical results show that these kinds of replacements more significantly dampened investment activities in listed private companies than in companies in which the city-level party secretaries have retained their positions. Corporate investment activities decreased more when a city-level party secretary was replaced with a person outside the city or parachuted from central government than when replaced within the city. Moreover, replacement effects were more negative for privatized state-owned enterprises (SOEs) than for the original privately owned companies.