Political Connections and the Efficiency of Capital Allocation Through Bond Financing in Chinese Listed Companies

Xiaoqin Zhao, Difang Wan and Hao Xu

Emerging Markets Finance and Trade, 2013, vol. 49, issue S2, 158-170

Abstract: Using a database of firms issuing short-term financing bonds and mid-term notes in China from 2007 to 2011, we uncover whether and how political connections influence the companies' capital allocation efficiency. The authors show that politically connected firms have significantly lower capital allocation efficiency, especially in the case of overinvestment subsamples. In addition, different types of political connections have different effects on firms' inefficient investments. Compared with firms connected to members of the people's congresses and the Chinese People's Political Consultative Conference (MPCP firms), firms connected to government officials (GOF) overinvest more and underinvest less. One year after bond financing, GOF politically connected firms decreased overinvestment, while underinvestment undergoes an upward trend in the MPCP firms.

Keywords: bond financing; capital allocation efficiency; overinvestment; political connections; underinvestment (search for similar items in EconPapers)
Date: 2013
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