Political connections, founder-managers, and their impact on tunneling in China's listed firms

• Manager CPC/CPPCC-type political connection reduces tunneling in private firms.
• Manager official-type political connection increases tunneling in SOEs.
• Political connections at central level have greater impact than those at local level.
• Firms with founder-managers have less tunneling than those without founder-managers.
• The chairman's political connection is more influential than CEO's political connection.

We investigate the impact of manager political connection and founder status on tunneling in China's listed firms from 2004 to 2010. By classifying the political connections into three dimensions with two categories of controlling ownerships, we find that overall manager political connection is negatively related to tunneling in private firms but positively related to tunneling in SOEs. The CPC/CPPCC-type connection is likely to protect firms from tunneling, while the official-type connection facilitates tunneling from firms. The impact of these two types of political connection on tunneling is stronger at the central level than the local level. A chairman's political connection has significantly greater influence on tunneling than a CEO's connection. We also find that firms with founder-managers have a stronger resistance to tunneling than those with non-founder-managers, which is still observed in firms with politically connected founder-managers. Our results show that the incentives of various managers towards tunneling depend on their motivation for establishing relevant political connections.