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

Listed author(s):
  • Cull, Robert
  • Li, Wei
  • Sun, Bo

    (Board of Governors of the Federal Reserve System (U.S.))

  • Xu, Lixin Colin

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.

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File URL: http://dx.doi.org/10.17016/IFDP.2015.1129
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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 1129.

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Length: 68 pages
Date of creation: 21 Jan 2015
Handle: RePEc:fip:fedgif:1129
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