Research On Corporate Political Connections, Debt Financing And Inefficient Investment

Since Modigliani and Miller put forward "theorem of no correlation" in 1958, Scholars at home and abroad research how debt financing affects investment from the aspect of agent cost, information asymmetric and condition of market financing etc. But there are always not convergent up to now. Research findings summarize three types:the first is that debt financing results in overinvestment; the second is that debt financing results in underinvestment; the third is that debt financing restrains overinvestment. Therefore, it is necessary to research that debt financing how to affect the action of corporate investment at another angle of view.Corporate political connections are usually described the relations between corporation and government or officials. Lost of facts and research indicate that political connections exists in corporate all over the world, especially in emerging market and developing country. It has been becoming a replacement mechanism of market and law system, and has important effect on corporate action. Chinese government have had great influence on social economics and played a dominant role in allocation of social resources during the economic transition period. Therefore, in order to get more resources and supports from government, corporation is inclined to construct political relations with government and officials by various means. Then, to research how debt financing affects investment from the perspective of political connections has important both theoretical and practical significance. But present literatures research in this aspect is insufficient.On the basis of literature review of related research both domestic and oversea, this paper makes use of theory of capital structure and public choice etc., and combines both normative and empirical research methods to make a research on how debt financing affects investment from the viewpoint of political connections based on the experimental data from 2005 to 2009 of Chinese Shanghai and Shenzhen listed companies. Firstly, this paper discusses political connections and government, political connections and market in order to indicate generation mechanism and the action mechanism of political connections. Secondly, this paper makes theoretical analysis and corresponding empirical test on the problem of political connections and debt restrain. Thirdly, this paper makes theoretical analysis and corresponding empirical test how debt financing affects investment and different kind of investment from the viewpoint of political connections. Lastly, on the basis of theoretical and empirical research, this paper makes countermeasure research how to restrain inefficient investment from the viewpoint of political connections.This paper makes the following main conclusion and opinion:①Because both government and market have problem of failure in reality, corporate political connections become a replacement mechanism of market, government and even law system, and have had more and more influence on social economics, especially in emerging market and developing country.②Corporate political connections will lead to corporation discrimination, the corporation with political connections can obtain more debt financing from banks than it not. That is to say, political connections weaken debt restrain.③From the perspective of entire investment, debt financing more easily lead to overinvestment because debt's restrain mechanism is confined by political connections effect.④From the perspective of different kind of investment, because different investment has respective characteristic and each corporate stakeholder's operability and monitoring difficulty to different investment is not the same, what debt financing affects each investment is different in action of political connections. The debt capital of the corporation with political connections is easily to be over invested by the intangible assets and long-term equity investment. However, it doesn't affect the inefficient part of fixed assets and R&D investment. The investment structure is altered by the crowd-out problems of the different investments, that is to say, the investment preference order of those enterprises is intangible assets, long-term equity, fixed assets and R&D.⑤This paper puts forward institutional arrangement to constrain corporate inefficient investment from the aspect of regulating connections between government and corporation, perfecting market mechanism, and sounding debts constraint mechanism. The conclusion is of certain significance to further deepen the theatrical research of the relations between financing and investment, regulate connections between government and corporations, and improve efficiency of investment.