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Throughout history, economic activities have been fundamentally shaped by ideology. Scholars usually consider ideology as a set of ethical ideas, principles, or doctrines of a social movement, institution, or class that concerns a specific form of government (eg democracy or autocracy) and economic system (eg capitalism or socialism). Corporations as the nexus of governments and markets are also organized around certain ideologies. Studying the role of ideologies in corporate decisions is important in understanding how resources are allocated across projects and social groups, yet it can be empirically challenging. First, it is notoriously difficult to measure ideology, which typically transcends traditional boundaries between the political right and left and falls within a political spectrum. Such ambiguity makes it challenging to measure ideology ex-ante using observable characteristics of politicians and CEOs. Second, ideology and economic activities are likely to be endogenously formed and can be jointly driven by unobservable factors such as culture and education. Third, it is difficult to disentangle the effect of ideology from that of other political and economic incentives, such as those stemming from government ownership or political connections. Therefore, establishing the causality between political ideologies and economic activities is not an easy task.

To address these difficulties, in our paper, we turn to a unique setting in China and study the systematic impact of political ideology on corporate policies. That helps us in three ways. First, it has been commonly recognized that a clear and sharp change in political ideology occurred in 1978 in China. We use this sharp change to measure ideological differences without relying on observable characteristics of politicians and CEOs. Communist ideology during the Mao Zedong era (1949–1978) comprised the traditional ‘Marxist-Leninist doctrine’ and completely rejected capitalism. Following the death of Mao, however, the Communist government of China dramatically changed course with the ‘Reform and Opening-Up’ policy, inaugurating a new period in 1978. In that year, China began to establish a market economy by legitimating profit-seeking, entrepreneurship, and inbound and outbound foreign direct investment. Thus, the subsequent communications and behaviours of the Chinese Communist Party (‘CCP’), which currently embrace markets and increasingly encourage internationalization, pose a sharp contrast to the rhetoric and propaganda during Mao’s rule. The political economy literature has generally classified the difference between Mao and Deng in terms of their economic policies into three pillars (eg Naughton (1993)Chang (1996)): (1) the trade-off between social and economic benefits, (2) the gap between rich and poor, and (3) the choice between self-sustaining and leveraging on foreign capitalism. Therefore, we examine three aspects of corporate outcomes that are closely related to these pillars.

Second, to address the issue of endogenous matching between ideology and corporate policies, we use a regression discontinuity design (‘RDD’) approach in the spirit of Marquis and Qiao (2018). The basic tenet of RDD is that an exogenously determined discontinuity in some explanatory variables helps researchers identify a (local) causal effect. In this setting, the age of politicians is an exogenous and predetermined qualification—ie from the inception of the CCP until 1978, individuals younger than 18 were not allowed to join the Party (with very few exceptions). Namely, politicians who did not join the CCP before 1978 because of the age qualification (eg the 17-year-old cohort), but then, subsequently, became members compose the control group, while those who were already approximately 18 years old (18–19) in 1978 and joined the CCP compose the treatment group. Marquis and Qiao (2018) consider the intensive training a person receives upon and after joining the CCP and show that this imprinting process has a lasting effect on an individual’s ideology. In this restricted sample of politicians within a small age range, it is reasonable to assume that they share similar personal characteristics (which is indeed the case in our empirical setting, as a whole battery of observables between the two groups do not differ significantly) with the exception of ideology, while the ‘age discontinuity’ (ie whether someone was 18 years old) in 1978 captures the impact of CCP imprinting. Therefore, in this quasi-natural experiment design, age discontinuity helps distinguish the impact of ideology from other individuals’ dispositional interest. 

Third, to disentangle the effect of ideology from that of other political and economic incentives and social norms, we partition our sample based on CEOs’ political connections, government ownership in the firm, as well as the degree of market-orientation and the prevalence of pre-existing CCP ideology of the local economy. These tests help us to further pin down the ideological influence.

We find that the age discontinuity of politicians around 18 years old in 1978 that had already joined the CCP or joined soon thereafter and later became city mayors, has had a lasting effect on contemporary city- and firm-level policies. Firms in cities with mayors joining the CCP under Mao’s ideological regime have more social contributions (eg tax contribution, employee payments, and donations), lower within-firm pay inequality (eg the ratio of average top-three executives to average employees’ salary), and less internationalization (eg the proportion of foreign assets and foreign sales) than those under Deng’s regime. We also find that the above-documented effects are stronger in firms with political connections, in non-state-owned enterprises, and in regions that are more market-oriented and not ‘revolutionary bases’. We find further evidence that ideology-induced corporate policy biases have some impact on firm performance and valuation.

The key takeaway from our paper is that ideologies are behavioural biases that affect agent decision-making. The impact of ideologies on economic activities is distinct from that of rational economic and political incentives. Once a certain ideology is formed, individuals collectively make decisions consistent with such beliefs regardless of external incentives. Politicians under the same political incentives can adopt strikingly different economic policies derived from their exposure to different ideologies. Corporations affiliated with a certain political ideology may voluntarily design corporate policies to adhere to the doctrine even without economic incentives through such actions as ownership.


Hao Liang is Assistant Professor of Finance & DBS Sustainability Fellow at the Lee Kong Chian School of Business, Singapore Management University.

Rong Wang is Associate Professor of Finance at the Lee Kong Chian School of Business, Singapore Management University.

Haikun Zhu is Assistant Professor in Finance at the Erasmus School of Economics, Erasmus University Rotterdam.