Firms' Political Connection,Capital Market Performance And Fund Advantage

In nearly 40 years, China's reform has made remarkable achievement in growth.GDP and people's living standard have improved significantly. It is inseparable from the establishment and perfection of China's socialist market economic system.However,it can't be ignored that some obstacles constraining economic development still exist when China's economic reform has entered a deepening stage. In particular,political factors distort the resource allocation and reduce the economic efficiency. It is also harmful to the fair market competition environment. It can also affect the entrepreneur's choice of behavior. Entrepreneurs are enthusiastic about the establishment of political connections these years. Even the intergenerational transmission of political relations is also quite valued. This process is related to the rent-seeking behavior of entrepreneurs. It provides the soil for corruptions. Therefore,it is helpful to fundamentally cut off the benefit channels between politicians and businessmen. It can provide recommendations for the construction of "pro” and"clear" new politicians- businessmen connections.This paper breaks through the existing research on the one-sidedness of the value of political connected firms from the perspective of financial indicators. Using the price discovery function of capital market, this paper examines the comprehensive impact of political connections on the value of Chinese firms from the perspective of the capital market performance.In addition, the interference of political factors on the allocation of resources is also reflected in the financing system of our country. Due to the existence of the fatherly doctrine, there are obvious dualistic structural features in our country's capital allocation: low-efficiency state-owned enterprises acquire low-cost funds from state-owned financial institutions, But efficient non-state enterprises have to accept high-cost funds, that is, the two-track allocation of funds (Huang and Li, 2016).Moreover, the capital market value of political connected firms is mainly explained by its financial advantages in the existing research, but the literature does not combine the analysis of the financial advantages of political connected firms with the background of China's dual-track system. This paper fills the blank.According to the difference of the time span, the research on the performance of political connected firms in this paper is divided into two parts: long-term and short-term. Chapter 3 discusses the relation between political connected firms and long-term stock returns, our paper constructs a monthly database containing matched information on corporate political connections and stock trading indicators. Based on this database, our paper examines the impact of political connections on the long-term returns of corporate stock. Even if a variety of indicators are used, it shows that political connections have no effect on long-term stock returns. This result reflects the achievement on the construction of China's capital market. Because of the high institutional quality, political factors do not affect the long-term value of the enterprise.In the further analysis, we find that the relationship between corporate political connections and long-term stock returns is not affected by property rights. However,when considering the strength of political connections, the chairman of the board who has "representative" political connections will bring a higher long-term absolute return to the firm than who has "official" political connections. In view of the robustness,we also use PSM to estimate the effect of political connections on firm's long-term stock returns. It has a similar result.Chapter 4 discusses the relation between political connections and short-term stock returns. Our paper uses the method of event study. We examine the effect that political connections have on short term stock performance in two events- the political event that officials arrive at their post and the capital market event that list companies issue additional stocks.In the political event, we use the appointment of secretary of the provincial party committee from 2005 to 2015 as the research background. According to the different scope of the enterprises affected by the event, we analyze the effect on firms registered in the office place and the official's birth place separately. It shows that this political event can bring short-term abnormal returns on listed companies registered in the office place. This effect is mainly due to the local governor and state-owned firms.For firms registered in the official's birth place,this effect is inexistent. In the event of officials transferring from other provinces,firms registered in the official's birth place will have abnormal loses.In the capital market event, we choose the listed companies from January 2000 to December 2015 and match them with the monthly database. It shows that political connections can bring short-term abnormal returns, especially in the seasoned equity offerings event and firms which have a connected chairman.The results show that there is no differences in long-term stock returns between connected and non-connected enterprises. On the basis of the comprehensive research,this paper explains the result in the conclusion part. It has been argued that the capital market value of political connected firms is mainly due to its funds advantage. In this paper, under the background of the dual system of funds, the advantages of political connected firms are reexamined.According to the different sources of funds, this paper analyzes the acquisition of government funds and market credit funds of political connected firms under the dual system of funds.The government funds obtained by the political connected enterprises mainly come from the government subsidy. It has been proved that the government subsidy of the political connected firms is closely related to the rent-seeking activities. Chapter 5 has an in-depth study. We construct a rent-seeking cost model containing political connections and use the data of listed companies to test the theoretical assumptions of the model. It shows that the political connected enterprises have the lower rent-seeking expenditure. This effect is more significant in the private enterprises. The impact of political connections on the cost of rent-seeking is mainly through the burden of enterprises. What's more, this paper confirms the existence of dual-track system in the government funds distribution, and finds that the political connections in private enterprises can break through the "ownership barriers" in the government funds distribution.Chapter 6 discusses market funds got by political connected firms. We collect the information of the listed companies and build up a loan database, which contains the information of financial institutions. On the basis of this database, we examines the existence of the dual-track fund system. The results show that there is no significant difference between the state-owned enterprises and the private enterprises in the amount of corporate loans from state-owned financial institutions. However, the interest rate of loans issued by state-owned financial institutions is much lower, and this effect is only significant when the borrower is a state-owned enterprise. It proves that there is a de facto dual-track fund system in our country. Political connections of private firms can help in promoting the amount of loans obtained from state-owned financial institutions, but they will not have a significant impact on the lending rates.The connections can't break the "ownership discrimination" caused by the dual-track fund system.The innovation of our paper mainly lies in the following three aspects: First of all,in the research content, based on the monthly frequency database, this article examines the long-term absolute return of stocks in Chinese political connected firms.It fills the gap of the study in localized political connections. In addition, for the first time, this paper examines the effect that political connections have on short term stock performance from the perspective of the political event that officials arrive at their post. The background of this event is more in line with the reality of our institutions.What's more, this paper for the first time examines the effect that political connections have on short term stock performance from the perspective that list companies issue additional stocks. It is a necessary supplement to the literatures on the impact of IPO events and also enriches the understanding of the performance of political connected firms under the impact of capital market events; Secondly, in the research data, this paper constructs a monthly database with the time span of ten years and contains the information of corporate political connections and the stock transaction index by matching the political connected information with the time when managers take and leave their office. Using this database, this paper examines the long-term stock returns of our political connected enterprises from the perspective of absolute returns and overcomes the limitations of the low-frequency short-period data.In addition, based on the listed companies loan microdata which contains the source institution, this paper not only examines the existence of the dual-track system, but also creatively examines the financing of political connected enterprises under the dual-track system of funds. It updates the understanding of the financing in political connected firms. Finally, in the aspect of theoretical innovation, this paper first describes the rent-seeking activities of political connected firms in theory. By introducing the political connection variables into the rent-seeking cost model, this paper finds that the political connection reduces the cost of rent-seeking through the burden path. Our paper improves the existing rent-seeking research of political connected firms.Of course, there are still some shortcomings in our paper. The quality of government subsidy data and endogenous treatment of rent-seeking costs are still not satisfactory.