IDEAS home Printed from https://ideas.repec.org/a/eee/reveco/v76y2021icp801-816.html
   My bibliography  Save this article

Political connections and product market competition: Effects and channels

Author

Listed:
  • Lin, Yan
  • Liu, Yijia
  • Chan, Kam C.

Abstract

We examine the effect of political connections (PCs) on firms' product market competition and the corresponding channels of this effect in China. Our findings suggest that PCs exert a negative impact on a firm's product market competition. Specifically, compared to non-PC firms, PC firms enjoy more competitive advantages. Moreover, we distinguish PCs stemming from managers and those stemming from directors. When compared to manager-only PC firms, director-only PC firms have stronger adverse effects on product market competition, indicating the effect of PCs is heterogeneous. Additional analysis shows that the effect of director-only PC firms on product market competition is more salient when directors have same industry and related-industry experience. Finally, we find corporate operating risks, trade credit, and financial constraints are important channels through which PCs influence product market competition.

Suggested Citation

  • Lin, Yan & Liu, Yijia & Chan, Kam C., 2021. "Political connections and product market competition: Effects and channels," International Review of Economics & Finance, Elsevier, vol. 76(C), pages 801-816.
    • Handle: RePEc:eee:reveco:v:76:y:2021:i:c:p:801-816
    DOI: 10.1016/j.iref.2021.07.009
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1059056021001520
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.iref.2021.07.009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Zhang, Rongrong, 2020. "Trade credit, cash holdings, and product market competition," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 132-146.
    2. Stephen P. Ferris & Murali Jagannathan & A. C. Pritchard, 2003. "Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments," Journal of Finance, American Finance Association, vol. 58(3), pages 1087-1111, June.
    3. Andrei Shleifer & Florencio Lopez-de-Silanes & Rafael La Porta, 2008. "The Economic Consequences of Legal Origins," Journal of Economic Literature, American Economic Association, vol. 46(2), pages 285-332, June.
    4. Petersen, Mitchell A & Rajan, Raghuram G, 1997. "Trade Credit: Theories and Evidence," The Review of Financial Studies, Society for Financial Studies, vol. 10(3), pages 661-691.
    5. Adalto Barbaceia Gonçalves & Rafael Schiozer & Hsia Hua Sheng, 2018. "Trade Credit and Product Market Power during a Financial Crisis," Working Papers CEB 18-004, ULB -- Universite Libre de Bruxelles.
    6. Allen, Franklin & Qian, Jun & Qian, Meijun, 2005. "Law, finance, and economic growth in China," Journal of Financial Economics, Elsevier, vol. 77(1), pages 57-116, July.
    7. Raymond Fisman & Mayank Raturi, 2004. "Does Competition Encourage Credit Provision? Evidence from African Trade Credit Relationships," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 345-352, February.
    8. Dang, Vinh Q.T. & So, Erin P.K. & Yan, Isabel K.M., 2018. "The value of political connection: Evidence from the 2011 Egyptian revolution," International Review of Economics & Finance, Elsevier, vol. 56(C), pages 238-257.
    9. Anita Rao, 2020. "Strategic Research and Development Investment Decisions in the Pharmaceutical Industry," Marketing Science, INFORMS, vol. 39(3), pages 564-586, May.
    10. Hilary, Gilles & Hui, Kai Wai, 2009. "Does religion matter in corporate decision making in America?," Journal of Financial Economics, Elsevier, vol. 93(3), pages 455-473, September.
    11. Calomiris, Charles W. & Fisman, Raymond & Wang, Yongxiang, 2010. "Profiting from government stakes in a command economy: Evidence from Chinese asset sales," Journal of Financial Economics, Elsevier, vol. 96(3), pages 399-412, June.
    12. Kebin Deng & Haijian Zeng & Yushu Zhu, 2019. "Political connection, market frictions and financial constraints: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(4), pages 2377-2414, December.
    13. Mariassunta Giannetti & Mike Burkart & Tore Ellingsen, 2011. "What You Sell Is What You Lend? Explaining Trade Credit Contracts," The Review of Financial Studies, Society for Financial Studies, vol. 24(4), pages 1261-1298.
    14. Banerji, Sanjay & Duygun, Meryem & Shaban, Mohamed, 2018. "Political connections, bailout in financial markets and firm value," Journal of Corporate Finance, Elsevier, vol. 50(C), pages 388-401.
    15. Wang, Fangjun & Xu, Luying & Zhang, Junrui & Shu, Wei, 2018. "Political connections, internal control and firm value: Evidence from China's anti-corruption campaign," Journal of Business Research, Elsevier, vol. 86(C), pages 53-67.
    16. Chen, Xuanjuan & Sun, Zhenzhen & Yao, Tong & Yu, Tong, 2020. "Does operating risk affect portfolio risk? Evidence from insurers' securities holding," Journal of Corporate Finance, Elsevier, vol. 62(C).
    17. Kale, Jayant R. & Loon, Yee Cheng, 2011. "Product market power and stock market liquidity," Journal of Financial Markets, Elsevier, vol. 14(2), pages 376-410, May.
    18. Chen, Shimin & Sun, Zheng & Tang, Song & Wu, Donghui, 2011. "Government intervention and investment efficiency: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 259-271, April.
    19. Justin Murfin & Ken Njoroge, 2015. "The Implicit Costs of Trade Credit Borrowing by Large Firms," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 112-145.
    20. Cheng, Louis T.W. & Chan, Ricky Y.K. & Leung, T.Y., 2018. "Impact of perk expenditures and marketing expenditures on corporate performance in China: The moderating role of political connections," Journal of Business Research, Elsevier, vol. 86(C), pages 83-95.
    21. Chaney, Paul K. & Faccio, Mara & Parsley, David, 2011. "The quality of accounting information in politically connected firms," Journal of Accounting and Economics, Elsevier, vol. 51(1-2), pages 58-76, February.
    22. Wei, Chunyan & Hu, Shiyang & Chen, Feng, 2020. "Do political connection disruptions increase labor costs in a government-dominated market? Evidence from publicly listed companies in China," Journal of Corporate Finance, Elsevier, vol. 62(C).
    23. Tao Bai & Stephen Chen & Xiao He, 2019. "How Home-Country Political Connections Influence the Internationalization of Service Firms," Management International Review, Springer, vol. 59(4), pages 541-560, August.
    24. Gul, Ferdinand A. & Leung, Sidney, 2004. "Board leadership, outside directors' expertise and voluntary corporate disclosures," Journal of Accounting and Public Policy, Elsevier, vol. 23(5), pages 351-379.
    25. De Rosa, Donato & Iootty, Mariana, 2012. "Are natural resources cursed ? an investigation of the dynamic effects of resource dependence on institutional quality," Policy Research Working Paper Series 6151, The World Bank.
    26. Liao, Li-Kai & Lin, Yi-Mien & Lin, Tsung-Wen, 2016. "Non-financial performance in product market and capital expenditure," Journal of Business Research, Elsevier, vol. 69(6), pages 2151-2159.
    27. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 120(2), pages 701-728.
    28. Liu, Baohua & Lin, Yan & Chan, Kam C. & Fung, Hung-Gay, 2018. "The dark side of rent-seeking: The impact of rent-seeking on earnings management," Journal of Business Research, Elsevier, vol. 91(C), pages 94-107.
    29. Clement Chow & Michael Fung & Kevin Lam & Heibatollah Sami, 2012. "Investment opportunity set, political connection and business policies of private enterprises in China," Review of Quantitative Finance and Accounting, Springer, vol. 38(3), pages 367-389, April.
    30. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, vol. 96(1), pages 369-386, March.
    31. Schweizer, Denis & Walker, Thomas & Zhang, Aoran, 2019. "Cross-border acquisitions by Chinese enterprises: The benefits and disadvantages of political connections," Journal of Corporate Finance, Elsevier, vol. 57(C), pages 63-85.
    32. repec:zbw:bofrdp:2009_007 is not listed on IDEAS
    33. Fabbri, Daniela & Klapper, Leora F., 2016. "Bargaining power and trade credit," Journal of Corporate Finance, Elsevier, vol. 41(C), pages 66-80.
    34. He, Qing & Li, Xiaoyang & Zhu, Wenyu, 2020. "Political connection and the walking dead: Evidence from China's privately owned firms," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 1056-1070.
    35. Andrei Shleifer & Robert W. Vishny, 1994. "Politicians and Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 995-1025.
    36. Paul J. Irvine & Jeffrey Pontiff, 2009. "Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1149-1177.
    37. Joel Peress, 2010. "Product Market Competition, Insider Trading, and Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 65(1), pages 1-43, February.
    38. Lemma, Tesfaye T. & Negash, Minga & Mlilo, Mthokozisi & Lulseged, Ayalew, 2018. "Institutional ownership, product market competition, and earnings management: Some evidence from international data," Journal of Business Research, Elsevier, vol. 90(C), pages 151-163.
    39. Claessens, Stijn & Feijen, Erik & Laeven, Luc, 2008. "Political connections and preferential access to finance: The role of campaign contributions," Journal of Financial Economics, Elsevier, vol. 88(3), pages 554-580, June.
    40. Wang, Xia & Feng, Mingming & Xu, Xiaodong, 2019. "Political connections of independent directors and firm internationalization: An empirical study of Chinese listed firms," Pacific-Basin Finance Journal, Elsevier, vol. 58(C).
    41. Smith, Janet Kiholm, 1987. "Trade Credit and Informational Asymmetry," Journal of Finance, American Finance Association, vol. 42(4), pages 863-872, September.
    42. Gu, Lifeng, 2016. "Product market competition, R&D investment, and stock returns," Journal of Financial Economics, Elsevier, vol. 119(2), pages 441-455.
    43. Stephen P. Ferris & Murali Jagannathan & A. C. Pritchard, 2003. "Too Busy to Mind the Business? Monitoring by Directors with Multiple Board Appointments," Journal of Finance, American Finance Association, vol. 58(3), pages 1087-1112, June.
    44. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    45. Huang, Sheng, 2014. "Managerial expertise, corporate decisions and firm value: Evidence from corporate refocusing," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 348-375.
    46. Joseph D. Piotroski & T. J. Wong & Tianyu Zhang, 2015. "Political Incentives to Suppress Negative Information: Evidence from Chinese Listed Firms," Journal of Accounting Research, Wiley Blackwell, vol. 53(2), pages 405-459, May.
    47. Fan, Joseph P.H. & Rui, Oliver Meng & Zhao, Mengxin, 2008. "Public governance and corporate finance: Evidence from corruption cases," Journal of Comparative Economics, Elsevier, vol. 36(3), pages 343-364, September.
    48. Boubakri, Narjess & Guedhami, Omrane & Mishra, Dev & Saffar, Walid, 2012. "Political connections and the cost of equity capital," Journal of Corporate Finance, Elsevier, vol. 18(3), pages 541-559.
    49. MARA FACCIO & RONALD W. MASULIS & JOHN J. McCONNELL, 2006. "Political Connections and Corporate Bailouts," Journal of Finance, American Finance Association, vol. 61(6), pages 2597-2635, December.
    50. Paul J. Irvine & Jeffrey Pontiff, 2009. "Idiosyncratic Return Volatility, Cash Flows, and Product Market Competition," The Review of Financial Studies, Society for Financial Studies, vol. 22(3), pages 1149-1177, March.
    51. Gonçalves, Adalto Barbaceia & Schiozer, Rafael F. & Sheng, Hsia Hua, 2018. "Trade credit and product market power during a financial crisis," Journal of Corporate Finance, Elsevier, vol. 49(C), pages 308-323.
    52. Sunil Dutta, 2008. "Managerial Expertise, Private Information, and Pay-Performance Sensitivity," Management Science, INFORMS, vol. 54(3), pages 429-442, March.
    53. Nishant Dass & Jayant R. Kale & Vikram Nanda, 2015. "Trade Credit, Relationship-specific Investment, and Product Market Power," Review of Finance, European Finance Association, vol. 19(5), pages 1867-1923.
    54. Correia, Maria M., 2014. "Political connections and SEC enforcement," Journal of Accounting and Economics, Elsevier, vol. 57(2), pages 241-262.
    55. Francis, Bill B. & Hasan, Iftekhar & Sun, Xian, 2009. "Political connections and the process of going public: Evidence from China," Journal of International Money and Finance, Elsevier, vol. 28(4), pages 696-719, June.
    56. David Schoenherr, 2019. "Political Connections and Allocative Distortions," Journal of Finance, American Finance Association, vol. 74(2), pages 543-586, April.
    57. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(1), pages 169-215.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tang, Xuesong & Lin, Yan & Peng, Qing & Du, Jun & Chan, Kam C., 2016. "Politically connected directors and firm value: Evidence from forced resignations in China," The North American Journal of Economics and Finance, Elsevier, vol. 37(C), pages 148-167.
    2. Brahma, Sanjukta & Zhang, Jing & Boateng, Agyenim & Nwafor, Chioma, 2023. "Political connection and M&A performance: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 85(C), pages 372-389.
    3. Cull, Robert & Li, Wei & Sun, Bo & Xu, Lixin Colin, 2015. "Government connections and financial constraints: Evidence from a large representative sample of Chinese firms," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 271-294.
    4. Li, Tongxia & Lu, Chun & Wang, Hui, 2023. "Stakeholder orientation and trade credit: Evidence from a natural experiment," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 15-34.
    5. Zhou, Zhongsheng & Li, Zhuo, 2023. "Corporate digital transformation and trade credit financing," Journal of Business Research, Elsevier, vol. 160(C).
    6. Su, Zhong-qin & Xiao, Zuoping & Yu, Lin, 2019. "Do political connections enhance or impede corporate innovation?," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 94-110.
    7. D'Mello, Ranjan & Toscano, Francesca, 2020. "Economic policy uncertainty and short-term financing: The case of trade credit," Journal of Corporate Finance, Elsevier, vol. 64(C).
    8. Agoraki, Maria-Eleni K. & Gounopoulos, Dimitrios & Kouretas, Georgios P., 2022. "U.S. banks’ IPOs and political money contributions," Journal of Financial Stability, Elsevier, vol. 63(C).
    9. Li, Zhimin & Cheng, Lei, 2020. "What do private firms do after losing political capital? Evidence from China," Journal of Corporate Finance, Elsevier, vol. 60(C).
    10. Vincent Tawiah & Abdulrasheed Zakari & Yan Wang, 2022. "Partisan political connections, ethnic tribalism, and firm performance," Review of Quantitative Finance and Accounting, Springer, vol. 58(4), pages 1331-1362, May.
    11. Altunok, Fatih & Mitchell, Karlyn & Pearce, Douglas K., 2020. "The trade credit channel and monetary policy transmission: Empirical evidence from U.S. panel data," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 226-250.
    12. Jiang, Fuxiu & Xia, Xiaoxue & Zheng, Xiaojia, 2021. "Does controlling shareholders' share pledging raise suppliers' eyebrows?," Pacific-Basin Finance Journal, Elsevier, vol. 66(C).
    13. James, Hui L., 2023. "Social capital and the riskiness of trade credit," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    14. Yi, Shangkun & Wang, Jian & Wang, Xiaoting & Feng, Hongrui, 2022. "CEO political connection and stock sentiment beta: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    15. Li, Mingsheng & Liu, Desheng & Peng, Hongfeng & Zhang, Luxiu, 2022. "Political connection and its impact on equity market," Research in International Business and Finance, Elsevier, vol. 60(C).
    16. Zhi Wang & Geert Braam & Daniel Reimsbach & Jiaxin Wang, 2020. "Political embeddedness and firms’ choices of earnings management strategies in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(5), pages 4723-4755, December.
    17. Farag, Hisham & Dickinson, David, 2020. "The power of Connections: Evidence from financial companies," Journal of Corporate Finance, Elsevier, vol. 64(C).
    18. Michelson, Noam, 2023. "The revolving door of former civil servants and firm value: A comprehensive approach," European Journal of Political Economy, Elsevier, vol. 79(C).
    19. Wang, Fangjun & Xu, Luying & Zhang, Junrui & Shu, Wei, 2018. "Political connections, internal control and firm value: Evidence from China's anti-corruption campaign," Journal of Business Research, Elsevier, vol. 86(C), pages 53-67.
    20. Nys, Emmanuelle & Tarazi, Amine & Trinugroho, Irwan, 2015. "Political connections, bank deposits, and formal deposit insurance," Journal of Financial Stability, Elsevier, vol. 19(C), pages 83-104.

    More about this item

    Keywords

    Political connections; Product market competition; Occupational positions; Types of directorship; Corporate governance;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:76:y:2021:i:c:p:801-816. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620165 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.