A Empirical Study Of Impacts That Manager’s Political Connections Of Private-owned Companies Listed In China Act On The Corporate Over-investment

As the present economic system of china is not perfect, the government still controls a large number of resources, which encourages the companies to employ the officials working in government departments as managers. By this way, the companies can association with the government and get more resources from the government. This phenomenon is more prevalent in private-owned companies listed. According to the statistics of this article, about45%private-owned companies listed in china have political connections. Many scholars had researched this phenomenon, but they just focused on the impacts that the political connections act on the corporate performance and values. Many scholars give their opinion that political companies would have lower taxes、more financing and more government subsidies, which are useful to improve the value of companies. But few scholars had studied the impacts that the political connections act on the corporate over-investment. We believe that political connections as personal characteristics of the managers, will affect the managers’behavior and psychological greatly. For example, the managers would do rent-seeking to the companies to improve their own profits and political capital, they also show much over-confidence. All those would lead the companies to over-investment. This article using1126private-owned companies listed from2007to2009years in china as study sample, empirically analysis the impacts that political connections of private-owned companies listed act on the corporate over-investment behavior. What’s more, this article has divided the political connections into two kinds. The first kind of political connections is come from corporate owners, the other is come from corporate operators. The results show that, if political connections do positive effect to corporate investment less than its negative effect, the companies will performance out over-investment behavior.Specifically this article can be divided into six chapters, each chapter can be described as follows:The chapter one. IntroductionThis chapter firstly describing the relative background in order to elicit the study and point out the significance of the study; Secondly, defining the relevant concepts involved in this article to help readers better understand; Thirdly, introducing the contents and framework of this study, of course including introduce the research methods used by this article; At the last, we concluding the contribution of this study.The chapter two. Literature reviewIn this chapter, literature is organized according to the research contents. Firstly, we review the research of political connections from domestic and international scholars. The researches to political connections mainly focused on its effects on corporate performance, value and corporate managers’behavior. At the present, most scholars believe that the managers in companies with political connections will brings companies more loans, more investment resources, lower taxes, more government subsidies and so on. But if political connections would improve corporate performance and values, different scholars had different opinions. Some researchers agree that political connections could bring companies many resources and then improve the corporate performance and values. But there are some scholars find that, political connections will stimulate managers do rent-seeking behavior to firms in order to improve their own political capital. They will expand investment blindly and employ more workers, which damage corporate value and also cause the corporate goes inefficiency.Secondly, we review the Literature about corporate over-investment. The researchers mainly studied the definition and reasons of corporate over-investment behavior, the inhibition mechanism of over-investment. To the definition of over-investment, scholars had two opinions:one is to define it according to companies’free cash flow, the other is to compare the actual amount of investment to the ideal investment. The reasons of over-investment are due to the defects of corporate governance and manager’s personal characteristics, such as over-confidence, loss aversion and herd mentality. Scholars also put forward the corresponding suppression measures, including improving the level of corporate governance, giving full play to the supervisory mechanism of the independent directors and reducing information asymmetry, making full use of the inhibitory effect of cash.Finally, analyzing the relationship between the managers’political connections and corporate over-investment.The chapter three. Relevant background and theoretical analysisThis chapter firstly analysis the relevant background of political connections to explain the source of political connections and the reasons why corporate would like to fight for political connections.Secondly, we use social capital theory, rent-seeking theory, agency theory and Maslow’s hierarchy of needs theory to analysis the impact political connections act on corporate over-investment. We find that political connections as a capital for the corporate would bring a lot of scarce resource and help firms improve their values. But on the other hand, the political connections would increasing the agency costs of managers, what’s more, the manager with political connections always show over-confidence and lack of management skills. All those are damaged to the firms’performance improve and value growth.Finally, according to the analysis for the above, we get three hypotheses of this study.The chapter four. Study designThis chapter is about the overall design of the empirical research. We firstly describe the method of this research. We using1126private-owned companies listed from2007to2009years in china as study sample, empirically analysis the impacts that political connections of private-owned companies listed act on the corporate over-investment behavior. This part also instructing the method to get the correspond data.At last, we set up multiple regression model to test our assumptions. Explaining and analyzing the model variables.The chapter five. The empirical results and analysisThrough variables descriptive statistical analysis, linear correlation analysis and multiple regression analysis, empirically studying impacts that political connections act on corporate over-investment. The results are as follows:the manager’s political connections don’t significantly affect the corporate over-investment behavior. But when dividing the political connections into two kinds, we can see the owner’s political connections would inhibit the over-investment in20%significant levels. The operator’s political connections significantly increased the corporate over-investment. These results are similar to the theoretical analysis, political connections will do both negative and positive effect to corporate investment. As long as the positive is not more than negative effects, the company will show over-investment.In order to enhance the persuasiveness of the conclusions in this study, we also do detection, but the results are the same.The chapter six. The study concludes and revelationsIn this part, we concluding the study results and giving relative suggestions. The main suggestions as follows:(1) accelerating the transformation of the economic system speed, improve the market economic system, thus weakening the role of government in the economy and reducing the motive to pursuit political connections;(2) the government should further intensify efforts to support private companies and to provide a better environment for the development of private-own companies;(3) increasing the supervision to operators and improving the incentives for operators to reduce agency costs.(4) playing the role of the independent director system and increasing the independent directors ratio.(5) the company should emphasis operators’ abilities but not their political connections.At the last, we also summarize the inadequacies of this study and future research prospects.The main contributions of this paper are as follows:(1) We studying the negative effects of political connections, but scholars had not done this research.(2) We studying the over-investment from the vision of managers, from the decision makers.(3) The study sample we used in the article were private-owned companies listed in china, which can exclude the interference of the state-owned companies.(4) We get new results. Political connections will do both negative and positive effect to corporate investment. As long as the positive is not more than negative effects, the companies will show over-investment.