Politically Connected Manager, Preferential Lending And Firm Value Of China's Listed Private Firms

Many foreign studies find that political connection, as a firm feature, just like ownership structure, will have an impact on firms. In China, which has just transformed from a highly centralized planned economy to a market economy, the government has great control of the market and a large number of listed private firms have political connection. Therefore, the study of political connection is meaningful in the context of China. Political connection here means that the firm's board chairman or CEO is ex- or current bureaucrats. We also use another definition of political connection, which means the firm's board chairman or CEO is ex- or current Deputy to the People's Congress (DPC).This study first examines the link between political connection and preferential lending, then the link between political connection and firm value of China's listed private firms. Using samples during 1998-2004, regression results show that: (a) there is no significant relationship between political connection and seasoned equity offering. But using Deputy to the People's Congress as indication of political connection,we find that political connection has a positive relation with banking loan financing at the 5% level of significance;(b)generally, there is no significant relationship between political connection and market valuation. However, after improving the model with two variables of different levels of bureaucrats (central and local), and two variables of different types of DPC (present DPC and previous DPC), we find that political connection as local bureaucrats and previous DPC has some positive effect on firm value; (c) taking the intensity of industry competition into account, empirical evidence indicates that in some extent politically connected managers are less professional than those without political connections.