Research On The Relationship Between Political Connections Of Business Executives And Corporate Over-investment

In recent years, China’s economic development has maintained a rapid growth of more than8%per annum, is also high on the scale of investment continues to expand and play an important role in stimulating economic growth. However, due to the restrictions of consumer demand and resources, while economic develop rapidly, some of our industry also appeared in "investment overheating" phenomenon, and lead to some serious social problems. Enterprise is the main entity in economic development."Investment overheats" in the macro level is closely related to over-investment in the micro level. The so-called over-investment is that enterprises will be held free cash flow investment in the net present value for the negative items, making the investment to deviate from its own growth opportunities, resulting in the loss of enterprise value. Over-investment companies will bring many negative consequences, not only cause a waste of corporate resources, but also seriously damage the company’s future value, and even lead to bankruptcy of the enterprise. As Jensen (1986) said, over-investment is one of the most serious challenges faced by all industrialized countries.To investigate the over-investment, scholars have proved from different angles that the following factors have different degrees of impact on the over-investment:financing constraints, ownership structure, debt management, executive compensation and the management of excessive self-confidence and so on. However, for the over-investment behavior of Chinese enterprises, only from the above points of view to consider is not enough. China economies is still in transition, the market system is not yet mature, in the context of the existing political and economic systems, institutional factors outside the market mechanism is also worthy of further research. Because of the special economic background characteristics, the market process and economic reform in China has a government imprint. In these thirty years, the government plays an important role in maintaining macroeconomic stability, the promotion of market economic development and institution building reform to make a significant contribution to China’s economic development, and control a considerable number of resources. Especially in the process of development of enterprises, government power and policy preferences in a large part have influence on the survival and competitive position of enterprise. The positional relationship between government and enterprise has become a source of political rent-seeking.Political association, as one of the most common form of corporate rent-seeking in China’s enterprises is widespread. China’s unique political background, the state-owned enterprises in the generated subordinate to the government has a natural "kinship" between the governments; private enterprise can be served by hiring officials or leaders to serve as deputies to the NPC or CPPCC members’way, established close ties with the government. The universality of this kind of political association has been confirmed in numerous studies in the domestic and foreign scholars, and scholars from the different levels has explored the active role and influence of political connections on corporate performance, taxation, property rights. However, in addition to the many benefits to the enterprise, the political relevance has some potential adverse effects as well.With the various aspects of the reform process, local governments have more power, but also facing greater pressure of local fiscal expenditure. Meanwhile, the promotion system "political Championship mechanism, as well as the performance concept-oriented, to a large extent on the will and behavior of officials plays a powerful incentive. The establishment of political association provided a mutual transfer of benefits between the bonds. Enterprise rent-seeking to government officials through political association, and the government lend a "grabbing hand" to the enterprise by using this political association. Specifically, the politics associated companies, will inevitably subject to government influence. In other words, in order to maintain political relevance, the companies have to pay the corresponding costs and even a certain price. The will of the government officials through the political relevance of this link may be imposed on enterprises and enterprises intervention, making business decisions to cast the color of the government action, leading to business deviate from market principles, and commitment to part of the Government’s social functions. Corporate over-investment may be a result of government will which has pressure on political association link. Out of the performance objectives and the needs of the officials’promotion, they have a strong incentive to influence the enterprises to expand investment, thereby increasing the GDP and fiscal revenue. In order to meet government needs, also in order to maintain the relationship between the governments, the enterprise may make perverse decision-making in their own interest objectives, resulting in the alienation of investment behavior. So, the establishment of a political association, in the end would be over-investment will produce what kind of impact? What kind of political association of excessive investment greater impact? The relationship between the two in different regions has what kind of difference in performance?Based on the above problems, this article analyzes the over-investment behavior of executives and political associations and enterprises in-depth, aims to combine the unique institutional background of China’s economic transition stage to explore the relationship between the two. Specifically, this study listed Chinese companies in2010as the original sample, a comprehensively investigated Chinese economies in transition system of political association and corporate over-investment relations, through theoretical analysis and empirical test, in an attempt to explain the effects of the politics associated with the excessive level of investment. In the measurement of political association, dummy variables are employed to measure as indicators of whether the political association exists. Learn from the methods of measurement of Law Party On (2009), this study investigates the proportion of government-backed executive team as a political association into a variable degree. Also, specific political association is divided into the central political association and local political association to compare different types of political effects associated. Finally this article examines different regions with different degree of government intervention, political association of excessive investment impact performance.In addition, the structure and content of the following arrangements:The first chapter is the introductory part of this paper. This chapter summarized the main content of the paper, including the research background, purpose and significance; research framework and structural arrangements; research methods and technology roadmap and expected contributions. The second chapter is the literature review section for this article. This chapter reviews the political association, corporate over-investment as well as the relationship between researches; and systematically analyzes the existing literature and Comment, in order to provide new perspectives and ideas for further research.Chapter III is the related theories and institutional context. First, from the rent-seeking theory and the government of the "grabbing hand" theory as a starting point on the enterprise to build the background and conduct of political association; introduced China’s economic transition phase associated with political and excessive investment in special institutional background, trying to from the institutional factors and theoretical level to explain the research ideas and basic logic.Chapter IV is the hypothesis part. This chapter for the institutional background and theoretical basis of the previous section, combined with the characteristics of China’s listed companies on the basis of theoretical assumptions established and proposed a four-point assumption of the politics associated with over-investment impact. Subsequently return to the model of expectations by over-investment estimates, filter data, selected sample and model building.Chapter V is empirical testing and results analysis. This chapter firstly samples descriptive statistical analysis of related variables, and then does the correlation test, and finally to the corresponding variables into the regression model, the four model validation. The results show that the generalized dummy variable for political association, political association type variable over-investment have a significant effect, a significant positive regulatory role of government intervention on the relationship between the two, the political relevance of the impact of the excessive level of investment is not significant validation.Chapter VI is the research and prospects part of this study. This chapter combines empirical test results to full text, makes summary and makes relevant practical recommendations, and finally combines the full text of discourse and certification process, points out the limitations and lacks of this study, and possible future research directions in the outlook.The research found that over-investment level significantly being relevant with executive politics associated, namely political associate severely affects the over-investment; excessive level of investment is not a result of the political relevance of the executives number the enterprise; phase for central political association, the local political association of enterprises over-investment has more significant influence; in different regions, with the degree of market and government intervention, the different levels of political association of the enterprise over-investment is not the same degree of influence. Therefore, in the process of China’s market, there should be proper and careful look at the government-enterprise relations, the establishment of a government-enterprise separation mechanism. On the one hand, the government should change their functions, to reduce the interference in the market;the other hand, enterprises should establish a modern enterprise system as soon as possible to improve the internal governance structure, to reduce non-efficiency behavior. Only the two common efforts on both sides could provide a fair and open market environment, and promote the healthy development of China’s enterprises.The contribution of this article is the theoretical analysis and empirical cross-sectional data of2010China’s Shanghai and Shenzhen A-share listed companies. In theory, it is an expansion of existing research and a useful supplement to expand the existing research in the field perspective. It enriches the literature of political association and over-investment; in practice, it provides a reference to regulate the government-enterprise relations, to guide enterprises to rational behavior.At the same time, there are some limitations of this research:First, for the specific operation of the measure of political association, the paper is not much breakthrough, still follow the previous studies to be measured by a dummy variable. The fact of political association in reality has a rich and complex content to be to break through the interviews and the depth of investigation further. Second, the correlation of political influence on the enterprise is a dynamic continuous process, because of limitation of operational data collection, the research of this paper is difficult, and is using only the cross-section data for research, which could have the results have been affected.