Study On The Corporate Governance Effect Of Political Connection

Political connection is widespread in Chinese private listed companies and the study of it has become a hot issue of academia circles. Most studies focused on the relationship of political connection and financing constraints, investment efficiency, investment behavior, the value of the company, and the private enterprises’ motive to establish political association, whereas the literature on the corporate governance effect of political association is thin. So, This paper is to explore the relationship between political association and corporate governance, which has important practical significance on further understanding impact of corporate political association as well as the governance problem of listed companies in China.The paper treats political association as an indirect corporate governance mechanism to study its action mechanism. Specifically, this thesis discusses it from two point of view which are the relation of Political association and debt governance、legal protection of investors governance.In theory, the debt governance is effective which ease the cost of management proxy. However, it is failure based on empirical studies of Chinese companies. This paper argues that the existence of political association will weaken the effect of debt governance by various means such as softening the debt constraints, weakening the bankruptcy constraint and affecting the debt camera governance.Lots of literatures put that the legal protection of investors can effectively restrain the block shareholder’s plunder from minority shareholders. This paper holds that Chinese judicial system is not independent, so the controlling shareholder can be granted political asylum through political association which can undermine the efficiency of the implementation of the law; thereby the governance effect of the legal protection of investors is weakened. In addition, the political connection will also affect the effectiveness of market supervision. As a result, market supervision can not be an alternative mechanism of lower judicial execution efficiency, and then governance effect of the legal protection of investors is weakened once again.On the basis of theoretical analysis, this paper draws and expands the Grossman and Hart (1982) model to test the weakening governance effect of debt governance and legal protection of investors from political connection. Finally, the thesis studies the corporate governance effect of the political association from empirical angle. Based on the above analysis, this paper proposes a few suggestions to improve corporate governance level:strength the independence of bank; improve the legislation to protect the creditors’ rights; establish an independent and impartial judicial mechanisms.