Empirical Research On The Effect Of Political Connection On Performance In China Private Firms

Krueger (1974) pointed out that "political connection is ubiquitous in the enterprises," which brought new ideas for scholars, and also raised the research on enterprise political connection. However, what is the exactly effect on enterprise performance from political connection? For this problem, scholars from the world have not form a unified conclusion. The author thinks that it may be connected to the institutional environment in which the enterprise is situated.The laws and regulations in our country are still imperfect, and effective property rights protection mechanism is lacked, private enterprise's property can not always effectively protected. In this context, the enterprise may have motivation to establish contact with government departments or personnel and use the relationship to protect its property from being infringed. Then, does the private enterprise political connection affect its performance? If so, does it promote or hinder the improvement of enterprise performance? So, the study is of great significance, whether for study itself or private enterprises, so it is necessary for us to exam how private enterprise political connection affect enterprise performance.This paper adopts 1568 private companies listed in Shenzhen and Shanghai stock exchange during 2007-2009 in china as research samples, builds regression model with the relevant variables about corporate characteristics and corporate governance controlled,and applies OLS to empirically study how the political connection affect corporate performance, the differences of the effect on corporate performance between local and central political connection and how the percentage of executives with political connection affect corporate performance. At last, we examine the influence of government intervention level differences on the relationship between political connection and corporate performance.The study shows that political connection has important effect on corporate performance. (1) On the whole, political connection of private firms in China is positively correlated with corporate performance. It shows that through the establishment of political connection, firms can bring benefits for its performance, promoting corporate performance. (2)The type of political connection (local or central) is not significantly associated with corporate performance. It suggests that there are no significant differences between the effect of local and central connection on corporate performance. Local political connection is not significantly associated with corporate performance, while central political connection is significantly positively correlated with corporate performance. (3)The percentage of executives with political connection is significantly and positively corrected with firm's performance. (4)The interaction with Local government intervention index and political connection is significantly and negatively correlated with corporate performance, political connection is significantly and positively correlated with corporate performance. It shows that in consideration of the institution background in provinces, of China, political connection still has significant and positive effect on corporate performance. The lower the degree of political association is, the smaller the effect of political connection on corporate performance. The higher the degree of political association is, the greater the effect of political connection on corporate performance is.