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‘Princelings’: Exploring a Special Type of Political Connection in Chinese Listed Firms

In this study, we identify a new type of political connection, referred to as “princelings,” who are the descendants of prominent and influential senior communist officials in the People’s Republic of China. We develop a theory of “Golden hens versus Chickens” to describe the major features of these connected firms. Consistent with the theory, compared to unconnected firms, “princelings” connected firms (PCFs) stockpile disproportionately larger retained earnings but pay lower cash dividends. We find that such behaviour is not due to either investment or precautionary motives. By examining the components of retained earnings, we identify a discrepancy in the accounting for changes in retained earnings, newly defined as “grey usage,” which potentially represents a newly identified means of tunnelling. Relative to matching firms, PCFs have higher average grey usages on retained earnings by CNY 4.68 million. The findings highlight for investors in PCFs the potential increased risk of expropriation through grey usages.