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Political connections, financial constraints, and corporate investment

Author

Listed:
  • Chung-Hua Shen

    (National Taiwan University)

  • Chih-Yung Lin

    (Yuan Ze University)

Abstract

This study investigates whether firms politically connected to the ruling party can mitigate financial constraints and increase their investments. Data on Taiwan-listed companies from 1991 to 2010 are used to answer the preceding issue. Results indicate that firms connected to the ruling party that transitioned into power can mitigate financial constraints, but results do not hold for firms connected to the opposition party that transitioned out of power. Firms connected to both parties have similar results with those connected to the ruling party, but the diminishing effect is weaker than those connected to the ruling party. Results further indicate that financially constrained firms can increase their investment when they have political connections to the ruling party. Finally, firms with strong connections can reduce financial constraints more effectively.

Suggested Citation

  • Chung-Hua Shen & Chih-Yung Lin, 2016. "Political connections, financial constraints, and corporate investment," Review of Quantitative Finance and Accounting, Springer, vol. 47(2), pages 343-368, August.
    • Handle: RePEc:kap:rqfnac:v:47:y:2016:i:2:d:10.1007_s11156-015-0503-7
    DOI: 10.1007/s11156-015-0503-7
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    2. Will Bartlett, 2023. "The performance of politically connected firms in South East Europe: state capture or business capture?," Post-Communist Economies, Taylor & Francis Journals, vol. 35(4), pages 351-367, May.
    3. René P. Orij & Saif Rehman & Hashim Khan & Faisal Khan, 2021. "Is CSR the new competitive environment for CEOs? The association between CEO turnover, corporate social responsibility and board gender diversity: Asian evidence," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(2), pages 731-747, March.
    4. Lin, Boqiang & Wu, Nan, 2022. "Will the China's carbon emissions market increase the risk-taking of its enterprises?," International Review of Economics & Finance, Elsevier, vol. 77(C), pages 413-434.
    5. Chin‐Hwa Lu & Chung‐Hua Shen, 2020. "Do networks or performance impact the promotion of Chinese officials? Evidence from prefecture‐level cities," Pacific Economic Review, Wiley Blackwell, vol. 25(4), pages 539-573, October.
    6. Meng, Qingbin & Li, Xinyu & Chan, Kam C. & Gao, Shenghao, 2020. "Does short selling affect a firm's financial constraints?," Journal of Corporate Finance, Elsevier, vol. 60(C).
    7. Yacine Belghitar & Ephraim Clark & Abubakr Saeed, 2019. "Political connections and corporate financial decision making," Review of Quantitative Finance and Accounting, Springer, vol. 53(4), pages 1099-1133, November.
    8. Alam, Ahmed W. & Houston, Reza & Farjana, Ashupta, 2023. "Geopolitical risk and corporate investment: How do politically connected firms respond?," Finance Research Letters, Elsevier, vol. 53(C).
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    More about this item

    Keywords

    Political connections; Financial constraints; Endogenous switching model; The ruling party;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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