IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Government connections and financial constraints : evidence from a large representative sample of Chinese firms

  • Cull, Robert
  • Li, Wei
  • Sun, Bo
  • Xu, Lixin Colin

This paper examines the role of firms'government connections, defined by government intervention in the appointments of Chief Executive Officers and the status of state ownership, in determining the severity of financial constraints faced by Chinese firms. In line with the previous literature, the paper demonstrates that investment by non-state firms is highly sensitive to internal cash flows, while no such sensitivity is found for government-owned enterprises. Even within the subset of non-state firms, government connections are associated with substantially less severe financial constraints (less reliance on internal cash flows to fund investment). The paper also finds that large non-state firms with weak government connections 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. Firms with government-appointed Chief Executive Officers also have significantly lower investment intensities, due perhaps to their lower-powered incentives. The empirical results suggest that government connections play an important role in explaining Chinese firms'investment behavior and financing conditions, and provide further evidence on the nature of the misallocation of credit by China's dominant state-owned banks.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2013/02/26/000158349_20130226082758/Rendered/PDF/wps6352.pdf
Download Restriction: no

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 6352.

as
in new window

Length:
Date of creation: 01 Feb 2013
Date of revision:
Handle: RePEc:wbk:wbrwps:6352
Contact details of provider: Postal:
1818 H Street, N.W., Washington, DC 20433

Phone: (202) 477-1234
Web page: http://www.worldbank.org/
Email:


More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. Steven M. Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 2000. "Investment-Cash Flow Sensitivities are Useful: A Comment on Kaplan and Zingales," The Quarterly Journal of Economics, Oxford University Press, vol. 115(2), pages 695-705.
  2. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert Vishny, . "Investor Protection and Corporate Governance," Working Paper 19455, Harvard University OpenScholar.
  3. Thorsten Beck & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2005. "Financial and Legal Constraints to Growth: Does Firm Size Matter?," Journal of Finance, American Finance Association, vol. 60(1), pages 137-177, 02.
  4. Jean-Jacques Dethier & Maximilian Hirn & Stéphane Straub, 2011. "Explaining Enterprise Performance in Developing Countries with Business Climate Survey Data," World Bank Research Observer, World Bank Group, vol. 26(2), pages 258-309, August.
  5. Simon Johnson & Todd Mitton, 2001. "Cronyism and Capital Controls: Evidence from Malaysia," NBER Working Papers 8521, National Bureau of Economic Research, Inc.
  6. Knack, Stephen & Keefer, Philip, 1995. "Institutions and Economic Performance: Cross-Country Tests Using Alternative Institutional Indicators," MPRA Paper 23118, University Library of Munich, Germany.
  7. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  8. Jun Du & Sourafel Girma, 2010. "Red Capitalists: Political Connections and Firm Performance in China," Kyklos, Wiley Blackwell, vol. 63(4), pages 530-545, November.
  9. Qian, Meijun & Yeung, Bernard Y., 2015. "Bank financing and corporate governance," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 258-270.
  10. Roger H. Gordon & Wei Li, 2012. "Provincial and Local Governments in China: Fiscal Institutions and Government Behavior," NBER Chapters, in: Capitalizing China, pages 337-369 National Bureau of Economic Research, Inc.
  11. Brown, James R. & Petersen, Bruce C., 2009. "Why has the investment-cash flow sensitivity declined so sharply? Rising R&D and equity market developments," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 971-984, May.
  12. Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998. "Law and Finance," Journal of Political Economy, University of Chicago Press, vol. 106(6), pages 1113-1155, December.
  13. Gordon, Roger H. & Li, Wei, 2003. "Government as a discriminating monopolist in the financial market: the case of China," Journal of Public Economics, Elsevier, vol. 87(2), pages 283-312, February.
  14. Héricourt, Jérôme & Poncet, Sandra, 2009. "FDI and credit constraints: Firm-level evidence from China," Economic Systems, Elsevier, vol. 33(1), pages 1-21, March.
  15. Loren Brandt & Hongbin Li, 2002. "Bank Discrimination in Transition Economies: Ideology, Information or Incentives?," William Davidson Institute Working Papers Series 517, William Davidson Institute at the University of Michigan.
  16. Beck, T.H.L. & Demirgüc-Kunt, A. & Martinez Peria, M., 2011. "Banking financing for SME's : Evidence across countries and bank ownership types," Other publications TiSEM c4d491c9-2cc6-40f6-ad55-a, Tilburg University, School of Economics and Management.
  17. Steven N. Kaplan & Luigi Zingales, 1997. "Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints?," The Quarterly Journal of Economics, Oxford University Press, vol. 112(1), pages 169-215.
  18. Stephen Knack & Philip Keefer, 1995. "Institutions And Economic Performance: Cross-Country Tests Using Alternative Institutional Measures," Economics and Politics, Wiley Blackwell, vol. 7(3), pages 207-227, November.
  19. 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), pages 58-76.
  20. Sean Cleary & Paul Povel & Michael Raith, 2003. "The U-shaped Investment Curve: Theory and Evidence," Finance 0311010, EconWPA.
  21. Miriam Bruhn & Dean Karlan & Antoinette Schoar, 2010. "What Capital Is Missing in Developing Countries?," American Economic Review, American Economic Association, vol. 100(2), pages 629-33, May.
  22. Charles Calomiris & Raymond Fisman & Yongxiang Wang, 2008. "Profiting from Government Stakes in a Command Economy: Evidence from Chinese Asset Sales," NBER Working Papers 13774, National Bureau of Economic Research, Inc.
  23. Rafael LaPorta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, . "Legal Determinants of External Finance," Working Paper 19443, Harvard University OpenScholar.
  24. Thorsten Beck & Asli Demirgüç-Kunt & María Pería, 2011. "Bank Financing for SMEs: Evidence Across Countries and Bank Ownership Types," Journal of Financial Services Research, Springer;Western Finance Association, vol. 39(1), pages 35-54, April.
  25. Chow, Clement Kong-Wing & Fung, Michael Ka Yiu, 2000. "Small businesses and liquidity constraints in financing business investment: Evidence from shanghai's manufacturing sector," Journal of Business Venturing, Elsevier, vol. 15(4), pages 363-383, July.
  26. Lin, Karen Jingrong & Tan, Jinsong & Zhao, Liming & Karim, Khondkar, 2015. "In the name of charity: Political connections and strategic corporate social responsibility in a transition economy," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 327-346.
  27. Harrison, Ann E. & Lin, Justin Yifu & Xu, Lixin Colin, 2014. "Explaining Africa’s (Dis)advantage," World Development, Elsevier, vol. 63(C), pages 59-77.
  28. Poncet, Sandra & Steingress, Walter & VANDENBUSSCHE, Hylke, 2008. "Financial constraints in China: firm-level evidence," CORE Discussion Papers 2008079, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  29. Steven N. Kaplan & Luigi Zingales, 2000. "Investment-Cash Flow Sensitivities are not Valid Measures of Financing Constraints," NBER Working Papers 7659, National Bureau of Economic Research, Inc.
  30. Yan, Isabel K. & Chan, Kenneth S. & Dang, Vinh Q.T., 2011. "Chinese Firms’ Political Connection, Ownership, and Financing Constraints," MPRA Paper 35221, University Library of Munich, Germany.
  31. World Bank & the People’s Republic of China Development Research Center of the State Council, 2013. "China 2030 : Building a Modern, Harmonious, and Creative Society," World Bank Publications, The World Bank, number 12925, April.
  32. Daron Acemoglu & Simon Johnson & James A. Robinson, 2000. "The Colonial Origins of Comparative Development: An Empirical Investigation," NBER Working Papers 7771, National Bureau of Economic Research, Inc.
  33. Stephen Bond & Julie Ann Elston & Jacques Mairesse & Benoît Mulkay, 2003. "Financial Factors and Investment in Belgium, France, Germany, and the United Kingdom: A Comparison Using Company Panel Data," The Review of Economics and Statistics, MIT Press, vol. 85(1), pages 153-165, February.
  34. Joshua D. Angrist, 2000. "Estimation of Limited-Dependent Variable Models with Dummy Endogenous Regressors: Simple Strategies for Empirical Practice," NBER Technical Working Papers 0248, National Bureau of Economic Research, Inc.
  35. Bliss, Mark A. & Gul, Ferdinand A., 2012. "Political connection and cost of debt: Some Malaysian evidence," Journal of Banking & Finance, Elsevier, vol. 36(5), pages 1520-1527.
  36. Guariglia, Alessandra & Liu, Xiaoxuan & Song, Lina, 2008. "Internal Finance and Growth: Microeconometric Evidence on Chinese Firms," IZA Discussion Papers 3808, Institute for the Study of Labor (IZA).
  37. Franklin Allen & Jun Qian & Meijun Qian, 2002. "Law, Finance, and Economic Growth in China," Center for Financial Institutions Working Papers 02-44, Wharton School Center for Financial Institutions, University of Pennsylvania.
  38. Takeo Hoshi & Anil K. Kashyap & David Scharfstein, 1989. "Corporate structure, liquidity, and investment: evidence from Japanese industrial groups," Finance and Economics Discussion Series 82, Board of Governors of the Federal Reserve System (U.S.).
  39. David Dollar & Shang-Jin Wei, 2007. "Das (Wasted) Kapital: Firm Ownership and Investment Efficiency in China," NBER Working Papers 13103, National Bureau of Economic Research, Inc.
  40. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, vol. 96(1), pages 369-386, March.
  41. Xu, Lixin Colin, 2010. "The effects of business environments on development : surveying new firm-level evidence," Policy Research Working Paper Series 5402, The World Bank.
  42. R. Glenn Hubbard, 1998. "Capital-Market Imperfections and Investment," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 193-225, March.
  43. 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.
  44. Faccio, Mara & Parsley, David C., 2009. "Sudden Deaths: Taking Stock of Geographic Ties," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(03), pages 683-718, June.
  45. Chen, Charles J.P. & Li, Zengquan & Su, Xijia & Sun, Zheng, 2011. "Rent-seeking incentives, corporate political connections, and the control structure of private firms: Chinese evidence," Journal of Corporate Finance, Elsevier, vol. 17(2), pages 229-243, April.
  46. Meghana Ayyagari & Asli Demirgüç-Kunt & Vojislav Maksimovic, 2010. "Formal versus Informal Finance: Evidence from China," Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 3048-3097, August.
  47. Boubakri, Narjess & Cosset, Jean-Claude & Saffar, Walid, 2008. "Political connections of newly privatized firms," Journal of Corporate Finance, Elsevier, vol. 14(5), pages 654-673, December.
  48. Boyreau-Debray, Genevieve & Wei, Shang-Jin, 2004. "Pitfalls of a State-Dominated Financial System: The Case of China," CEPR Discussion Papers 4471, C.E.P.R. Discussion Papers.
  49. Cull, Robert & Lixin Colin Xu & Tian Zhu, 2007. "Formal finance and trade credit during China's transition," Policy Research Working Paper Series 4204, The World Bank.
  50. Xiaozu Wang & Lixin Colin Xu & Tian Zhu, 2004. "State-owned enterprises going public "The case of China"," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 12(3), pages 467-487, 09.
  51. Chong-En Bai & Jiangyong Lu & Zhigang Tao, 2006. "The Multitask Theory of State Enterprise Reform: Empirical Evidence from China," American Economic Review, American Economic Association, vol. 96(2), pages 353-357, May.
  52. Berger, Allen N. & Udell, Gregory F., 2006. "A more complete conceptual framework for SME finance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2945-2966, November.
  53. Fan, Joseph P.H. & Wong, T.J. & Zhang, Tianyu, 2007. "Politically connected CEOs, corporate governance, and Post-IPO performance of China's newly partially privatized firms," Journal of Financial Economics, Elsevier, vol. 84(2), pages 330-357, May.
  54. Cull, Robert & Xu, Lixin Colin, 2003. "Who gets credit? The behavior of bureaucrats and state banks in allocating credit to Chinese state-owned enterprises," Journal of Development Economics, Elsevier, vol. 71(2), pages 533-559, August.
  55. Berger, Allen N. & Hasan, Iftekhar & Zhou, Mingming, 2009. "Bank ownership and efficiency in China: What will happen in the world's largest nation?," Journal of Banking & Finance, Elsevier, vol. 33(1), pages 113-130, January.
  56. Steven N. Kaplan & Luigi Zingales, 2000. "Investment-Cash Flow Sensitivities Are Not Valid Measures of Financing Constraints," The Quarterly Journal of Economics, Oxford University Press, vol. 115(2), pages 707-712.
  57. James R. Brown & Steven M. Fazzari & Bruce C. Petersen, 2009. "Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom," Journal of Finance, American Finance Association, vol. 64(1), pages 151-185, 02.
  58. Sean Cleary, 1999. "The Relationship between Firm Investment and Financial Status," Journal of Finance, American Finance Association, vol. 54(2), pages 673-692, 04.
  59. Claessens, Stijn & Feijen, Erik & Laeven, Luc, 2007. "Political Connections and Preferential Access to Finance: The Role of Campaign Contributions," CEPR Discussion Papers 6045, C.E.P.R. Discussion Papers.
  60. Mara Faccio, 2010. "Differences between Politically Connected and Nonconnected Firms: A Cross-Country Analysis," Financial Management, Financial Management Association International, vol. 39(3), pages 905-928, 09.
  61. Jiang, Guohua & Rao, Pingui & Yue, Heng, 2015. "Tunneling through Non-Operational Fund Occupancy: An investigation based on officially identified activities," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 295-311.
  62. Weisbach, Michael S., 1995. "CEO turnover and the firm's investment decisions," Journal of Financial Economics, Elsevier, vol. 37(2), pages 159-188, February.
  63. Tian Zhu, 1999. "China'S Corporatization Drive: An Evaluation And Policy Implications," Contemporary Economic Policy, Western Economic Association International, vol. 17(4), pages 530-539, October.
  64. Boyreau-Debray, Genevieve, 2003. "Financial intermediation and growth - Chinese style," Policy Research Working Paper Series 3027, The World Bank.
  65. Joseph G. Altonji & Todd E. Elder & Christopher R. Taber, 2005. "Selection on Observed and Unobserved Variables: Assessing the Effectiveness of Catholic Schools," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 151-184, February.
  66. Hongbin Cai & Hanming Fang & Lixin Colin Xu, 2011. "Eat, Drink, Firms, Government: An Investigation of Corruption from the Entertainment and Travel Costs of Chinese Firms," Journal of Law and Economics, University of Chicago Press, vol. 54(1), pages 55 - 78.
  67. Michael J. Cooper & Huseyin Gulen & Alexei V. Ovtchinnikov, 2010. "Corporate Political Contributions and Stock Returns," Journal of Finance, American Finance Association, vol. 65(2), pages 687-724, 04.
  68. Francis, Bill B. & Hasan, Iftekhar & Sun, Xian, 2009. "Political connections and the process of going public : evidence from China," Research Discussion Papers 7/2009, Bank of Finland.
  69. Eitan Goldman & Jörg Rocholl & Jongil So, 2009. "Do Politically Connected Boards Affect Firm Value?," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2331-2360, June.
  70. Angrist, Joshua D, 2001. "Estimations of Limited Dependent Variable Models with Dummy Endogenous Regressors: Simple Strategies for Empirical Practice: Reply," Journal of Business & Economic Statistics, American Statistical Association, vol. 19(1), pages 27-28, January.
  71. Jeremy C. Stein, 2001. "Agency, Information and Corporate Investment," NBER Working Papers 8342, National Bureau of Economic Research, Inc.
  72. 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.
  73. Chen, Tao, 2015. "Institutions, board structure, and corporate performance: Evidence from Chinese firms," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 217-237.
  74. Leuz, Christian & Oberholzer-Gee, Felix, 2006. "Political relationships, global financing, and corporate transparency: Evidence from Indonesia," Journal of Financial Economics, Elsevier, vol. 81(2), pages 411-439, August.
  75. Li, Hongbin & Meng, Lingsheng & Wang, Qian & Zhou, Li-An, 2008. "Political connections, financing and firm performance: Evidence from Chinese private firms," Journal of Development Economics, Elsevier, vol. 87(2), pages 283-299, October.
  76. Chen, Huafeng (Jason) & Chen, Shaojun (Jenny), 2012. "Investment-cash flow sensitivity cannot be a good measure of financial constraints: Evidence from the time series," Journal of Financial Economics, Elsevier, vol. 103(2), pages 393-410.
  77. Lixin Colin Xu & Tian Zhu & Yi-min Lin, 2005. "Politician control, agency problems and ownership reform," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 13(1), pages 1-24, 01.
  78. Cull, Robert & Xu, Lixin Colin, 2005. "Institutions, ownership, and finance: the determinants of profit reinvestment among Chinese firms," Journal of Financial Economics, Elsevier, vol. 77(1), pages 117-146, July.
  79. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September.
  80. Ayyagari, Meghana & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2012. "Financing of firms in developing countries : lessons from research," Policy Research Working Paper Series 6036, The World Bank.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:wbk:wbrwps:6352. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Roula I. Yazigi)

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 profile, as there may be some citations waiting for confirmation.

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

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.