Escaping Political Extraction: Political Participation, Institutions, and Cash Holdings in China
AbstractWe study the effects of political participation on holdings of liquid assets in a transition economy. Previous research has shown that the risk of political extraction by politicians and bureaucrats in countries with weak institutions has an adverse effect on holdings of liquid assets. We propose that political participation by private entrepreneurs can function as a means to alleviate some of that risk. Our empirical results indicate that political participation is positively related to cash holdings in China, especially in regions with weak institutions proxied by lower GDP per capita, lower marketization levels, and weaker property protection. Cash holdings have a negative effect on firm value as measured by the market-to-book ratio. However, political participation, the combined effect of cash holdings and political participation, as well as the combined effect of cash holdings, political participation, and institutions are all positively associated with firm value. Political participation thus results in an improved ability for firms that function in an environment fraught with the risk of political extraction to increase their holdings of liquid assets as well as a related positive effect on firm value.
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Bibliographic InfoPaper provided by China Economic Research Center, Stockholm School of Economics in its series Working Paper Series with number 2011-18.
Length: 41 pages
Date of creation: 15 Mar 2011
Date of revision:
Contact details of provider:
Postal: China, Economic Research Center, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
Phone: +46-8-736 90 00
Fax: +46-8-31 81 86
Web page: http://www.hhs.se/CERC/
More information through EDIRC
Political participation; Private entrepreneurs; Cash holdings; Political extraction; China;
Find related papers by 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
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
- P48 - Economic Systems - - Other Economic Systems - - - Political Economy; Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-26 (All new papers)
- NEP-POL-2011-03-26 (Positive Political Economics)
- NEP-TRA-2011-03-26 (Transition Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kim, Chang-Soo & Mauer, David C. & Sherman, Ann E., 1998. "The Determinants of Corporate Liquidity: Theory and Evidence," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 33(03), pages 335-359, September.
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