Political connections and corporate overinvestment: evidence from China

Zhong-qin Su, Hung-gay Fung and Jot Yau

International Journal of Accounting & Information Management, 2013, vol. 21, issue 4, 285-296

Abstract: Purpose - – Using panel data for the period 2004-2010, this study shows that political connections have a significant positive effect on corporate overinvestment in China while their interaction with related-party transactions has a negative effect. Results also indicate that state-owned enterprises (SOEs) controlled by the Chinese central government tend to have greater overinvestment than non-SOEs. However, their interaction with related-party transactions has an opposite effect on overinvestment, lending support to the conjecture that firm ownership structure plays a significant role in corporate overinvestment decisions. The paper aims to discuss these issues. Design/methodology/approach - – Panel data analysis and regression. Findings - – This study shows that political connections have a significant positive effect on corporate overinvestment in China while their interaction with related-party transactions has a negative effect. Results also indicate that SOEs controlled by the Chinese central government tend to have greater overinvestment than non-SOEs. Research limitations/implications - – The research shows some Chinese firms' behavior that indicates expropriation of minority stockholders. Policymakers should be aware of this issue as overinvestment is not good for the economy as a while. The limitation of the study is based on six-year data. Practical implications - – Stockholders should monitor the firms to mitigate the overinvestment problems in Chinese firms. Originality/value - – This is the first paper to examine the overinvestment issue along with related-party transactions and political connections.

Keywords: Ultimate ownership; Political connections; Overinvestment (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijaimp:v:21:y:2013:i:4:p:285-296

DOI: 10.1108/IJAIM-02-2013-0006

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