Political Connection And The Efficiency Of Long-term Debt Financing Resources Allocation

A common phenomenon during economic developing process all over the world is that:the construction of relationship between enterprise and government officers or politicians. Itis very important for Chinese enterprises maintain a close relationship with governmentbecause now China is under the reforming economic background. Political connection hasimportant influence on many aspects of the enterprise, including resulsts of operating,financial policy, operating performance, even the capital market, which becomes a focus inthe field of financial research. Currently, most of the existing researches on the politicalconnection influence on the allocation of resources found that political connection had afunction of resource allocation, and the companies with political connection can get moreresources by the government. On the surface, it seems that political connection has a positiveeffect. But it is not appropriate to get a conclusion so simply. To examine whether thepolitical connection has a positive political role, it is necessary to make a further examinewhether the resource allocation function of political relevance is efficient. If the companieswith political connection, after obtaining more resources, are able to effectively use them andenhance the enterprise value, then it shows that the political connection can improve theefficiency of resource allocation; On the contrary, If the companies with political connection,after obtaining more resources, are not able to effectively use them, resulting in waste ofresources and reducing the value of the enterprise, then it shows that the political connectioncan reduce the efficiency of resource allocation. Therefore, the problem that how politicalconnection can affect efficiency of resource allocation is the major issue to be urgentlyanswered which relates to the national economic reform and development.From the domestic and foreign research situation point of view, the existing literaturemainly research in such areas as political connection and corporate resource allocation,political connection and corporate value. But there are some flaws in such literatures: ingeneral the first kind of literatures is limited to research the impact of political connection onresource allocation, and not reaches its influence on the efficiency of resource allocation; Thesecond kind of literatures in general, directly researches the influence of political connectionon corporate value or performance, but could not provide specific approaches of influence. On the base of the existing related literatures, this paper has researched the impact of politicalconnection on the efficiency of resource allocation from the long-term debt financingperspective. First, this paper has demonstrated the basic conclusion of the existing literatureand investigates if the political connection is helpful for enterprises in obtaining long-termdebt financing resources. It is a fundamental precondition of this paper. Second, then aims atthe problem of resource allocation efficiency of a long-term debt financing, which has notbeen discussed in existing studies. We research the influence of political connection on theresource allocation efficiency of a long-term debt financing from the perspective ofover-investment and corporate value.The results show that:（1） The estimated coefficient of the political relevance is significantly positive, whichindicates that companies with more political relevance have got more long-term debtfinancing with respect to those non-political connection companies after controlling otherinfluenced factors, this conclusion is the same with the existing results.（2）The more long-term debt financing the political relevance companies get, the moreeasily over-investment happens, and thus it produces a negative impact on the corporatevalue.（3） The conclusions of this paper also provides evidences for the low efficiency ofinformal institutional arrangements, deepens researches in the informal system, at the sametime, provides a strong basis for China’s ongoing market-oriented reforms.