The Impact Of Political Connections On Firm’s DEBT Policy Empirical Evidence From Chinese Listed Companies

Combining the theoretical analysis with empirical test, this paper studies the influence of the political connections on debt policy of listed company. First, considering institutional background in China, the paper theoretically deduces how political connections influence debt policy of listed company, including debt financing scale and debt financing maturity, how different degrees political connections affect debt policy of listed company differently, at the same time this paper induces how political connections affect corporate manners directly by weakening the relationship between asset structure and firm’s debt policy. And then, controlling firm characters related variables, this paper adopts cross-sectional data of1274non-financial companies that listed in Shenzhen and Shanghai stock exchange before December31.2008and applies series of OLS, parametric and non-parametric test to empirically examine how political connections affect firm’s debt policy including debt financing scale and debt financing maturity. The empirical evidence provided by the paper shows that Political Connections do affect firm’s debt policy. To be specific,(1)comparing with firms without Political Connections, firms with Political Connections are easier to obtain larger debt financing scale and longer debt financing maturity;(2) degrees of Political Connections have significant effects on firm’s debt policy, the higher the Political Connections grade is, the larger the debt financing scale and the longer the debt financing maturity are;(3)because of implicit guarantee of the government, to some degree, Political Connections can weaken the positive relationship between asset structure and debt financing scale, debt financing maturity. This paper suggests that based on the unique institution environment in China, because of the implicit guarantee of the government, Political Connections working as the alternative mechanism of law system reduce the execution costs of debt contracts. So Political Connections can help connected firms gain bank debt, especially long term bank debt, without good creditor legal protection. Through analysis and research, this paper explains one of the way that how political connection affects corporate governance, which have certain theoretical and practical significance. On the one hand, this expanding study abounds the literature of modern company theory of finance and provides empirical evidences to later studies. On the other hand, this study infers the motivation and reasons to build the political connections from both the sides of company and government and empirically examine how political connections affect firm’s debt policy, which can help us to understand the factors behind the economic power and help company to choose the right financing policy. At the same time, this paper can provide references for making the policies regarding to country, promote the reform of state-owned enterprises and the long-term development of the capital market.