A Study On Legal Environment,Political Connection And Economic Consequences:Based On Chinese Listed Companies

Under the legal and financial framework proposed by LLSV,Allen et al(2005)carried out an investigation in China and questioned the "Chinese mystery" of a deviation of its backward legal system from its rapidly developing economy.Recent studies have explored the developing paths of Chinese enterprises mainly from the perspective of informal system arrangement,in which political connection plays a part.This relation-dependent informal system,which has been receiving all the more attention from scholars in terms of its value and significance,is quite common in Chinese enterprises.Not only do state-owned enterprises have natural political identity,but private enterprises also tend to participate in politics in order to establish political connections.The establishment of such connections,however,differs from one enterprise to another;and,the role political connection can play and the effects it can exert also vary greatly.What on earth,therefore,has caused such disparities?Is it the difference in the formal legal system?Based on these questions and from the perspective of the relationship between the formal legal system and the informal one,this paper applies the law and finance theory advanced by LLSV to the detailed analysis of how legal environment can influence enterprises’ establishment of political connections and how it can influence the role political connection can play and the effects it can exert.In this study,A-share non-financial enterprises listed from 2003 to 2009 in China serve as research subjects.Through a study of the operation of Chinese formal legal system,and with an application of the law and finance theory to enterprises on a micro-level,this paper to some degree answers the question of "Chinese mystery"(Allen et al,2005).With a combination of theoretical analysis with empirical research,this paper explores the legal environment,political connection and their economic implications for enterprises.It starts with a literature review of previous theoretical and empirical studies on political connection,law and finance theory,and their influence on enterprises.According to the institutional background in China,features of Chinese legal system and the status quo of political connections in Chinese enterprises are analyzed;besides,related models are set up to depict the interactive process between the formal legal system and political connection.In the empirical research,this paper discusses how legal environment can influence the establishment of political connections by enterprises,and how it can influence the role played by political connection in helping enterprises obtain government support and in promoting the development of enterprises.This topic can help enrich the existing studies for a better understanding of the presence and operation of "external governance of law," and by paying attention to the legal values in China’s economic transition,this paper aims to provide rationale for government to follow through the "rule of law" and for enterprises to improve the legal environment.This paper is divided into seven chapters as follows:The first chapter is introduction.In this chapter,research background,research significance and research problems are covered.Research thinking,main contents,research framework and the improvement and innovation of this research are illustrated.The second chapter is literature review.Previous theoretical and empirical studies related to this research are analyzed.A literature review of political connection,a literature review of the influence of legal environment on political connection,a literature review of the influence of legal environment on enterprises and a literature review of the influence of political connection on enterprises are included in this chapter.Through a study of the status quo and limitation of related previous studies,this chapter lays a foundation for later study of the influence of legal environment on political connection,and of the role and value of legal environment and political connection in the development of enterprises.The third chapter is an analysis of related theories and system background.This chapter can be divided into three parts.In the first part,features of the legal system operation in China are analyzed and defects of such a formal legal system are discussed.This part is followed by an introduction to related theories of political connection,the history of Chinese political connection and the status quo of political connection in listed Chinese enterprises.Based on the status quo of government governance in China,the third part attempts to put forward a local government-centered legal environment model.The fourth part is a study of the influence of legal environment on the establishment of political connections by enterprises.On the basis of literature review,this chapter presents a hypothesis,samples and data,and statistical methods to explore what influence legal environment can exert on the establishment of political connections by enterprises.This chapter,in addition,includes two types of political connections,one being a connection with government officials and the other being a connection with political representatives.The influence of changes in legal environment on the establishment of the two types of political connections is explored with case studies of state-owned enterprises and private ones.The fifth chapter is a study of legal environment,political connection and government bias.This chapter mainly discusses the influence of legal environment on the role political connection can play in helping enterprises avoid being investigated and punished,and obtain subsidies from government and loans from banks.Considering the major motive for establishing political connections is to gain an edge in government resources allocation,this paper suggests that political connection,as a substitute for unsound legal system,would lose its edge with the improvement of legal system.This question is further analyzed by advancing a hypothesis,collecting samples and data,and designing statistical methods.Different types of political connections and different ownership structures,in addition,are also analyzed.The sixth chapter is a study of legal environment,political connection and their economic implications for enterprises.Since opinions are divided among previous studies about what influence political connection can exert on enterprise performance,this paper attempts to explore this question from the perspective of the influence legal environment on the operation of political connections.How changes in legal environment can cause changes to the role played by political connection in ROA,ROE and ROS,and BAHR is investigated.Different types of political connections and different ownership structures,in addition,are also analyzed.The seventh chapter is a conclusion.Major conclusions,research enlightenment and suggestions on policies are covered,and the limitation of this research and direction of future research are analyzed.Major conclusions are as follows:1.Legal environment can exert some influence on the establishment of political connections.This paper reaches a conclusion that formal legal environment can influence the establishment of political connections by enterprises,and that relatively less sound legal system is more likely to cause the establishment of political connections by enterprises.2.Legal environment can influence the role played by political connections in helping enterprises win over government preference.This research concludes that formal legal environment can influence the role played by political connections in helping enterprises win over government preference,and that improvement of legal environment can weaken such a role.3.Legal environment can bring about economic implications for enterprises through their political connections which function in a complex way in the development of enterprises.This paper concludes that formal legal environment can influence the role played by political connections in enterprise expansion,enterprise performance and long-term value of enterprises,and that improvement of legal environment can weak the role played political connection,whether it is negative or positive.The findings of this research indicate that the establishment of political connections can bring about benefits to enterprises in terms of government resources allocation;but that those benefits are not necessarily guarantees of better performance,which may even do harm to the long-term value of enterprises.The improvement of legal environment can reduce and weaken political connections—a sign of a possible tense relationship between formal legal system and political connection.A sound legal system,therefore,needs to be established to lay a solid institutional foundation for the long-term development of enterprises.The improvement and innovation of this research is as follows:1.Innovation in topic selection.Legal environment has become a focus of research in the financial field since LLSV put forward the law and finance theory,and political connection,common in listed Chinese enterprises,has been studied and discussed by scholars both at home and abroad.Though current studies have acknowledged political connection as part of the informal legal system,and possible influence formal legal system can exert on it has also been investigated,a systematic study of the relationship between the two,or rather,the influence of the formal legal system on political connection,has rarely been seen.In the parts of literature review and theoretical analysis,not only related theories,the system replacement theory,the rental-seeking theory and the government governance theory,for example,are analyzed to explore the influence of formal legal system on the establishment and operation of political connection,but channels and methods to exert such influence are also discussed based on the status quo of the legal systems in China.This paper also explores the tournament theory and builds a local government-centered legal environment model,in an attempt to depict how formal legal environment can influence the informal one—in this case,political connection—in China.Abundant literature review and adequate theoretical argumentation lay a solid foundation for a systematic study of this issue.2.Innovation in research perspective and contents.Domestic studies of political connection mainly use private enterprises as research subjects and political connection types usually do not differ from one to another.This paper,in contrast,divides political connections that exist in enterprises into two types based on their methods to establish such ties,one being a connection with government officials and the other being a connection with political representatives.According to different ownership structures of enterprises,this paper separates state-owned enterprises from private ones,in an effort to explore the status quo of political connection in Chinese enterprises in a comprehensive way.Not innovative as it is,such a classification has helped this paper reach some conclusions distinct from previous studies.This paper starts with a study of what influence legal environment can exert on the establishment of political connections,before proceeding to a study of what influence legal environment can exert on the role played by political environment in obtaining government support.To further the research,a study of what influence legal environment can exert on the role played by political connection in the development of enterprises is also conducted.In such a way,how legal environment influences the establishment,existence and value of political connections is illustrated.Compared with that of previous studies,such an arrangement of thesis structure shows the consistency of argumentation and helps the paper discuss the influence of formal legal system on political connection in a relatively comprehensive way.3.Improvement in research methods.With related previous studies and theoretical models,this paper presents a hypothesis,samples and data,and empirical solutions to explore related questions.Detailed analyses prove that the legal environment listed Chinese enterprises are in can influence not only the establishment of political connections,but also government support and development of enterprises.To the part of empirical research,metrological methods are also applied.Based on the features of the variables that need to be interpreted,such multiple regression analysis methods as Probit and OLS are applied in this research.Given that whether an enterprise is investigated and punished is determined by an enterprise’s violation tendency and inspection probability,Brivariate Probit is also used in the study of what influence legal environment can exert on the role of political connection in helping enterprises avoid being investigated and punished.In light of the controversy over how to measure political connections,different indices are chosen to reduce the sensitivity of research conclusions to the measurement methods of variables.