Abstract:

Why do firms publicly echo government language? Two common explanations are noise, under
which alignment is payoff-irrelevant, and government consumption, under which the regime re
wards aligned firms because it directly values alignment. We propose a third explanation: the
regime can use alignment to screen firms for costly political support. We develop a contracting
framework encompassing all three explanations and derive two results. First, absent screening,
alignment cannot predict differences in firms’ mean payoff responses or costly actions when polit
ical stress materializes. Second, under optimal screening, lower-cost firms align, provide greater
support, and receive more favorable treatment. We test these predictions using a transparent
measure constructed from listed Chinese firms’ use of regime-specific phrases in annual reports.
More-aligned firms experience larger valuation losses after an adverse political shock and provide
costly support by retaining more workers during local labor unrest. Within our framework, these
responses rule in a screening role and are consistent with optimal screening.