Political Connection, Debt Financing And Enterprise Idiosyncratic Risk

China is in the period of economy transition. The government plays an important role of the enterprises, and it also has significant impact on the survival and development of the enterprises. Considering the relation between political connection and debt financing in Chinese listed companies as a starting point, this paper studies the impact of political connection on debt financing or enterprise idiosyncratic risk.First, the dissertation gives an overall review of the theory including political connection and debt financing, and then the relation of political connection, debt financing and enterprise idiosyncratic risk in our country is discussed. This paper chose all Chinese listed companies from 2004 to 2008 as the researching samples, and did an empirical test on the inherent relationships of political connection, debt financing or corporate non-systematic risk. The main works including:①How to measure the enterprise idiosyncratic risk, we used the CAPM model to calculate the non-systematic risk: first, using the stock market returns (annual) andβ(annual) to calculate the expected return rate (annual), and then using the actual rate of return (annual) to minus the expected return rate (annual); finally, the square value of their difference is the enterprise idiosyncratic risk.②We selected these companies which their CEO or chairman had a turnover as the researching samples. According to the change of political connection before and after the CEO or Chairman turnover, the samples were divided into 4 groups, and each group was done the independent sample T test respectively, to initial tested the impact of political connection on debt financing or enterprise idiosyncratic risk.③We constructed the regression models, and chose the data of the listed companies to the empirical study.The results of the empirical study as follows: (1)The debt financing rate of political connection enterprises was significantly higher than non-political connection enterprises. (2)The non-systematic risk arising from debt financing of political connection enterprises is significantly greater than the non-political connection enterprises, and that was mainly due to the greater risk of the local government political connection enterprises. (3)Other factors also affect the non-systematic risk: the larger the scale, the smaller the non-systematic risk; and the higher the leverage or the better the growth of the enterprises, the greater the non-systematic risk.As an emerging capital market, our capital market system is not perfect. Government intervention has frequently occurred in the bank credit resources, so that it is easier for political connection enterprises to be facilitated access to financing. This is not conducive to the fair competition in the market. The debt financing advantages of political connection enterprises do not play the effectiveness of their debt management, insteadly, they increase the risk. It is necessary to improve our capital market system, strengthen the capital market regulation, reduce the inappropriate government intervention behavior in our capital markets, and promote the healthy development of China's capital market. Meanwhile, for the enterprises, they should improve the employment mechanism of the executive talents, consider the executive's political background, and must reasonably control the financial decision-making behavior to reduce the risk.