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Government Connections and Financial Constraints: Evidence from a Large Representative Sample of Chinese Firms

Robert Cull (), Wei Li, Bo Sun () and Lixin Xu ()

No 1129, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: 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; invest cash flow sensitivity (search for similar items in EconPapers)
JEL-codes: G18 G21 G28 G38 O16 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2015-01-21
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-cna, nep-pol and nep-tra
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http://www.federalreserve.gov/econresdata/ifdp/2015/files/ifdp1129.pdf Full text (application/pdf)
http://dx.doi.org/10.17016/IFDP.2015.1129 http://dx.doi.org/10.17016/IFDP.2015.1129 (application/pdf)

Related works:
Journal Article: Government connections and financial constraints: Evidence from a large representative sample of Chinese firms (2015) Downloads
Working Paper: Government connections and financial constraints: evidence from a large representative sample of Chinese firms (2013) Downloads
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