Government Attention, Politically Connected CEOs and Corporate Risk-Taking: Evidence From Bounded Rationality

This study employs the perspectives of bounded rationality to examine how government attention affects corporate risk-taking. Additionally, it explores the moderating role of politically connected CEOs’ access to privileged information. A dataset of 1,995 Chinese A-share public firms for the period 2011 to 2020 is employed. The data were analyzed using fixed effect regression. The two-step system GMM estimator, an assessment for omitted variable bias, lagged variable tests, and alternative measures of key variables were used for the robustness test. The findings indicate that both direct and indirect government attention are inversely related to corporate risk-taking. However, this negative relationship is significantly lessened for firms led by politically connected CEOs. These CEOs appear to leverage their access to exclusive information to more effectively mitigate government regulations. This mitigating effect varies; it is most pronounced in two specific situations: (a) in firms with strong internal corporate governance, especially when they are under direct government scrutiny, and (b) in regions with weaker external institutional environments, where political connections act as a substitute for formal market structures. Furthermore, the mechanism analysis reveals that this relationship is channeled through agency costs and financial constraints. Practically, these findings assist companies in balancing the demands for risk-taking and the social duties of government, enabling them to develop effective risk strategies for utilizing these connections to attain a suitable level of risk for the company.