Research On The Influence Of Political Connections On Firms’ Financial Performance And Social Responsibility

Since reform and opening up, private enterprises experienced a rapid development. They became not only a useful complement to the public sector of the economy, but also helped to increase unemployment and create revenue, active markets, accelerate GDP growth and maintain social stability. The influence of private enterprises is also increasing through times.Political connection is defined as a covert relationship that exists between the government and private enterprises. This implicit relationship formed through three main ways:Resigners from government office or administrative institutions set up private business of their own; Hiring former Government officials to serve in the enterprise; Executives of private enterprises being elected as deputies of NPC or CPPCC. Under the background of transition economy from planned to market and relationship-oriented social structure, political links between private enterprise and the government are widely existed. In 2013, among the directly listed private companies in Shenzhen and Shanghai security and exchange market, executives (Chairman, Vice Chairman, CEO and Chief Financial Officer) background that have at least one official took up 15.8% of overall samples, and companies with at least on NPC deputies or CPPCC deputes identities at 31.5%.One point to clarify is, there are essential differences between political connections and corruption, although both arose from rights. Corruption belongs to the misconduct and need to be resolutely eliminated and punished. While political connections existed within a legal framework. Political connection itself is neither right nor wrong. The key point is the motive to establish this contact and whether they can be legally and appropriately used to maintain and promote the business’s own interests, also taking into account the social benefits. During the transition process from planned to market economy, from central to local, government still control the important resources of approval rights. Relative legal regulations and system environment are still insufficient for the constraint and supervision on government behavior and they also failed to perfectly protect and effectively regulate the behaviors of market subjects. So private enterprises may have strong motivations to pursue and establish connections with government.For private firms, the impacts of political connections on the firms’ financial performance could be either positive or negative. On the one hand, politically connection may help to provide facilities in taxations, financing activities, investment and so on. On the other hand, these connections may also result corresponding costs, such as renting, agency problems and excessive investment etc. The ultimate effect is positive or negative, current literatures have not reached any unanimous conclusions. In addition, when private enterprises are in the pursuit of economic efficiency, they are also responsible for various stakeholders, namely, social responsibilities, which are the social benefits firms must pay attention to. Social responsibilities include the responsibilities for shareholders, creditors, employees, social contributions, environmental protection and so on, which can be classified into many levels and dimensions. Researches from domestic and foreign scholars showed that businesses with political connections are significantly different with non-politically connected businesses in terms of social responsibility. Based on the background of transformation economy of China, this paper analyzed based on the theory of government intervention, theory of principal-agent, renting theory and theory of resource reliance. Sample firms are selected from the panel data of private listed companies from 2009 to 2013. This article made a detailed classification of connection types and levels, using bi-directional panel fixed effect, compared the effects of different types and different levels of on enterprises’financial performance and social responsibility performance. The effects of different system environment are also been tested. Finally, this article drew conclusions and put forward policy recommendations.The body of this article consists of seven chapters, the first chapter is an introduction section, the second and third chapters are the developing background analysis and theory and literature review, chapter fourth is the institutional background analysis, chapter 5 and 6 consist of empirical analysis, the seventh chapter is the conclusion.The first chapter is an introduction. This section is a brief introduction to the content of the research, including the background and significance of the research, the research framework and the major innovation.Second chapter is an analysis of the background of the development of private enterprises. This part mainly retrospects the developing economic and social environment of China’s private firms, as well as the game of formal and informal systems under transition economy background. This chapter also includes a brief description of China’s people’s congresses and political consultative system and analyzes on the facts of ownership discrimination and plunder of property right suffered by the private enterprises in the case of formal system imperfection. Then this part summarizes formation ways of the political connection for private firms.Chapter 3 is the theoretical review and literature review part. This chapter summarizes the relevant theories and literatures which include national and international ones from two perspectives:The first perspective focuses on the relevant theories and empirical influences of political connection on firms’ value; the second perspective is the review of theories and empirical research on political connection on corporate social responsibility.The fourth chapter is an analysis of institutional background. This part analyzes the relationship between private firms and institutional environment based on the regional distribution. Then this chapter constructs theoretical models to demonstrate the influences of political connection on financial performance and social responsibility under different system environments.Fifth chapter provides empirical analysis on the effects of political connection on the financial performance of the company. This part combines related theories reviewed in c previous chapter, then put forward research assumptions according to different type, different level and system environment variations. And empirical research shows that overall political connections have no significant effects on enterprise financial performance. But the results vary according to different connection types and different environments.Sixth chapter did the empirical analysis of the political connection on corporate social responsibility. Based on the theories reviewed in literature review part, this chapter distinguished political connections into different types and different levels, considering the effects of system environment variations, then proposed major research assumptions. Major findings are:the overall political connection and social responsibility are significantly correlated; the effects of government connection and representative connections differ substantially; while system environment variations play an important role in political connection effects.The main conclusions and prospects are included in the seventh chapter. This section is a summary of main conclusions, pointing out the disadvantages and future research directions.In terms of theoretical analysis aspect, this paper carried out illustrations based on the economical transformation background of China, using relevant theories such as government intervention, principal-agent theory, theory of "helping hand" and "plundering hand", renting theory and resources reliance theory, set up theoretical models to verify the relationship between private enterprise development and system environment and explored the mechanism of political connections on private enterprise financial performance and social responsibility under different system environment. The major conclusions of this thesis are:(1) The political link is an informal system, which functioned as an alternative mechanism in case of imperfect legal system and regulation, to some extent, help to protect private property rights against local government behavior.(2) The regional imbalances in the development of private enterprises lie in variation of the local governments’behavior, i.e. the different system environments. Under a relatively fair and just environment, the private property rights of private enterprise can be adequately protected and the development of local private enterprises will be better; conversely, the development of private enterprises will be lowered. Private enterprises in the more developed regions, local governments tend to play a "helping hand" effect; and the development of private enterprises in the less developed regions, it is because the Government is more likely to have played a "grabbing hand" effect.(3) From the theoretical model analysis, this thesis deducted that in the good institutional environment region, the correlation between political connections and enterprises’performance are weaker and the relationship between social responsibility and political associations are stronger; While in the less marketable areas, there is a stronger positive correlation between political relationship and business performance, while the correlation between political connections and social responsibility are weaker.Based on the results from theoretical analysis, this article selected panel data set 2009-2013 private listed companies, divided political connections according to types and levels and proposed research assumptions regarding the correlation among political connections, financial performance and social responsibility, then set up empirical models. In empirical research part, we used bi-directional panel fixed effect regression to analyze and compare the effects of different types and different levels of connections on enterprises’financial performance and social responsibility performance, taking into consideration the influence of system environment variations, and combined with cluster-robust standard errors to assure the robustness of results.The main conclusions go as the followings:(1) The impact of different connections types on financial performance and social responsibility are significantly different.(2) Financial performance aspect:Overall political associations had no significant effect on the firms’ financial performance; Connections of representatives and committee members show positive effects on financial performance of private listed firms, and this correlation is more significant when the connection levels are higher; While government officials connections have no significant effect on the financial performance of private listed firms.(3) Social accountability aspect:The overall political conjuncture has a significant positive impact on social responsibility; For the representatives and committee members connections of key executives, there is a positive correlation between political connections and social responsibility, which also varies positively according to the connection levels. But connections due to official type are found to have had no significant effect on corporate social responsibility performance.(4) System environment impact:In the regions with poor institutional environment, political connections due to representatives and committee members have more obvious positive impact on financial performance; In the regions with better institutional environment, private listed firms also have better social responsibility performances.(5) Regression results on the relationship between social responsibility and financial performance confirm that the enterprises’financial performance has positive effects in improving corporate social responsibility performance.This study provided empirical evidence for the theory of "helping hand" and "grabbing hand". It should be noted that, on a micro-level aspect, political connections affect the enterprise’s production and management and financial performance and also plays a certain role in promoting corporate social responsibility. But from a macro-perspective, political relation’s presence is not conducive to market-oriented allocation of resources, and also runs counter to fair competition, so it needed to be regulated and constricted by the government and private firms.Compared with previous studies, this paper may have innovations in the following areas:(1) Previously, there were many researches focusing on political connections and firms’financial performance or firms’value, but these researches varies in terms of sample selection, time ranging, definition and measurement of political connections. So research conclusions also do not consistent with one another. This paper selected directly listed private enterprises, evaluate political connections by dividing connection types into four species type respectively, which are government officials class, representative members class, bank class and army class. By detailed classification, we managed investigating the effects on financial performance or value, avoiding possible deviations caused by general classification. To some extent, this paper enriched the existing research and has some practical significance.(2) Corporate social responsibility and performance drew more and more attentions from stakeholders. For private listed firms, social responsibility is an issue of concern. To compare and investigate the differences of politically connected private enterprises and non-political associated enterprises in terms of social responsibility does have some theoretical significance to some extent. This paper used uniform measurement of social responsibility, ie. social contribution per share, to measure social responsibility. It made the social responsibility implementation comparable among firms. Because there are not too many relevant literatures researching on the empirical correlation between political connections and corporate social responsibility, this research broadens the perspective of political association to some extent.(3) Institutional environment can’t be ignored when doing research on political connections and influences on private enterprises. The relationship between private firms and government constitutes an important environment for survival and development of private firms. This paper constructs a theoretical model to analyze the relationship among development of private firms, political connections and system environment, then ran empirical test and found out that:In a relatively sound and relaxed environment, private enterprises often get a very fast development; While in the poorer system environment regions, private enterprises are more inclined to pursue political association for the promotion of the enterprise’s financial performance; Through the study of the relationship between political associations and social responsibility, this paper also found that in better system areas, the correlation between representatives and members connections and social responsibility performances seem to be more obviously positive correlated. These findings will also help to study the mechanisms how political association are formed in private enterprises and what are the influences on social accountability, combined with institutional factors.(4) This paper provides empirical evidence about the impact of political connections on financial performance and social responsibility. Pursuing financial performance is the spontaneous economic goal for enterprises, while social responsibility is the enterprises’ social accountability. But social responsibility is not a "spontaneous" responsibility, central and local governments need to make efforts to strengthen the guidance and supervision of corporate social responsibility, this paper may help to provide some useful policy recommendations enable the government to guide corporate social responsibility.