Standing up for profitability or bowing to political pressure? A study of government economic growth targets and firm performances

Purpose This paper aims to quantify political pressure imposed by Chinese prefectural governments and investigate whether and how it affects state-owned enterprises' (SOEs) performance. We aim to enrich the current literature on governmental factors that influence micro-entities by innovatively introducing a new measure of political pressure. Design/methodology/approach We employ a prefecture-level sample of listed non-financial firms in China to estimate a regression model. Robustness tests are conducted using alternative measures of key variables. This paper employs an instrumental-variable approach and a regression discontinuity design technique to reduce the endogeneity concern. Findings This paper supports the hypothesis of “grabbing hands” effect of governmental intervention by revealing a negative link between gross domestic product (GDP) target pressure and SOE profitability. Under high political pressure, SOEs tend to take more risks, amass debt and increase capital expenditure with lower turnover. This effect is more pronounced when GDP is vital for official assessment, especially for large manufacturing firms with higher government ownership or those directly supervised by local governments. Greater completion of the GDP target intensifies the impact on SOEs. Originality/value This study sheds light on the importance of political pressure as a key determinant of firm performance, documenting the differential effects of political forces on performance between SOEs and non-SOEs. It also enhances the understanding of firm behavior within the context of corporate-politics in China.