Relationship-based debt financing of Chinese private sector firms: The role of social connections to banks versus political connections
Haoyuan Ding,
Yichuan Hu,
Kenneth Kim and
Mi Xie
Journal of Corporate Finance, 2023, vol. 78, issue C
Abstract:
We study whether a firm's social connections to banks can augment its political connections to help it obtain loans. In China, Regulation No. 18 (announced in 2013) prohibits all high-level government officials from being independent directors of firms. As a result, many firms lost their political connections. We find that after firms lose their politically connected independent directors, firms having no social connections to banks experience, on average, a 12% decrease in the bank loan ratio relative to the median ratio; but those whose board chairs or CEOs are socially connected to local bank branch heads experience a 22% increase in the loan ratio relative to the median. However, this positive effect is short lived and thus not a new equilibrium. Overall, our findings support the hypothesis that a firm's social connections to banks can augment its political connections to help it get bank financing.
Keywords: Political connections; Social connections; Bank financing; China (search for similar items in EconPapers)
JEL-codes: G32 G38 P34 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (3)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:78:y:2023:i:c:s092911992200178x
DOI: 10.1016/j.jcorpfin.2022.102335
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