Government connections and financial constraints: Evidence from a large representative sample of Chinese firms
Robert Cull (),
Bo Sun () and
Lixin Xu ()
Journal of Corporate Finance, 2015, vol. 32, issue C, 271-294
We examine the role of firms' government connections, defined by government intervention in CEO appointment and the status of state ownership, in determining the severity of financial constraints faced by Chinese firms. We demonstrate that government connections are associated with substantially less severe financial constraints (i.e., less reliance on internal cash flows to fund investment), and that the sensitivity of investment to internal cash flows is higher for firms that report greater obstacles to obtaining external funds. We also find that those large non-state firms with weak government connections, likely the engine for innovation in the coming years in China, are especially financially constrained, due perhaps to the formidable hold that their state rivals have on financial resources after the ‘grabbing-the-big-and-letting-go-the-small’ privatization program in China. Our empirical results suggest that government connections play an important role in explaining Chinese firms' financing conditions, and provide further evidence on the nature of the misallocation of credit by China's dominant state-owned banks.
Keywords: Financial constraints; Investment; Political connections; Firm size; China; Capital allocation (search for similar items in EconPapers)
JEL-codes: G18 G21 G28 G38 O16 (search for similar items in EconPapers)
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Working Paper: Government Connections and Financial Constraints: Evidence from a Large Representative Sample of Chinese Firms (2015)
Working Paper: Government connections and financial constraints: evidence from a large representative sample of Chinese firms (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:32:y:2015:i:c:p:271-294
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