Institutional Environment, Political Connection and Financial Constraints---Evidence from Private Enterprise in China

Hongbo Duan and Abdul Razak bin Chik

Business and Management Research, 2012, vol. 1, issue 1, 133-140

Abstract: On the condition that formal institution of China has not protected the main economic entities especially non-public cases adequately, "political connection" existed, and it has become a good complement to the formal institution. The majority of non-public economic entities form the political connection with the government actively in various ways, thus it improves their own ability to access debt capital and increases enterprises' value. We make a further refinement of the intensity of political connection in reference to historical research and make a combination of institutional environment, political connection and capital structure. We analyze the relationship between the three from both the "theory" and "data validation" perspectives. Firstly, we review the relevant papers from different angles. Then, we make some hypotheses, select the variables and build models to test the relationship between the three. We use the descriptive statistical analysis, Pearson correlation test, OLS regression testing and some other methods to make inference and proof to the theoretical hypotheses in order to provide quantitative basis for the theory of sublimation. Our research found that the listed private companies in the areas where have lower level of property rights protection and financial development are more likely to form a stronger political connection. The enterprises which have or have a stronger political connection can obtain more bank credit.

Date: 2012
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