Political Connections, Bank Loans And Firm Value

Political connections are prevalent worldwide. In recent years, the economic consequences of political connections caused widespread attention of scholars home and abroad. Related studies have found that political connections can bring convenience to private enterprises, but the academia has not reached an agreement on the overall impact of political connections on the firm value. Also, scholars severely studied the path of political connections’influence on firm value.Our country is in the economic transition period, the characteristics of scare economic resources play incisively. For the survival and development, all of the economic entities battle for the economic resources fiercely. Chinese private enterprises have tried to establish political connections with the government. Then, through the establishment of political connections, can China’s private enterprises obtain more bank loans and superior conditions for loans? If political connections can help private enterprises obtain more bank loans, how is their investment efficiency? Is the effect of the political connections to enterprise value positive or negative? These are precisely the problem to be solved in this paper.Collecting the executive political connection data of China’s privately listed corporations from2007to2011, this paper researched:(1) the impact of political connections on bank loans, long-term bank loans, short-term loans and debt maturity structure;(2) the impact of the bank loans on firm value (3) the impact of the political connections on the relationship between bank loans and firm value (4) the overall impact of political on firm value.This paper is divided into six chapters. Each chapter of the research structure is shown as below.The first chapter:Introduction. Firstly, we proposed research questions of this paper on the basis of research background; and elaborated the theoretical and practical significance of this study, and then illustrate the ideas and research framework of this study. At last illustrate the ideas and research framework of this study with the form and the chart.The second chapter:Literature review. Review the existing literature at home and abroad about the three important variables,(1) the research on political connections, including the definition and metrics of political connections;(2) the influence of political connections on bank loans;(3) the impact of the political connections on the relationship between bank loans and firm value (4) the overall impact of political on firm value. Then, we reviewed and summarized the existing literature in order to lay a solid foundation for the theoretical analysis and empirical research.The third chapter:The theoretical analysis and the research hypothesis. Firstly, this paper reviewed the relevant contents of law and finance theory, the formal institution and informal institution, the capital structure theory, the reputation information theory and the rent-seeking theory. Then, this paper put forward five important assumptions.The fourth chapter:Research and design. It firstly introduces the sample selection and data sources, and then introduces the empirical models and the definitions of the relevant variables and calculating method.The fifth chapter:Empirical results and analysis. Based on the model proposed, this paper introduces the descriptive statistics of the related variables, correlation analysis, regression analysis and the robustness test.The sixth chapter:Conclusion and enlightenment. The conclusions of this study are summarized. This part also put forward some suggestions, the limitations of the study, and the directions of future research.Through empirical research, this paper reached the following conclusions:Firstly, the political connections are helpful to obtain bank loans. On the one hand, politically connected companies’bank loan scale is significantly higher than that of non-political connected companies; On the other hand, politically connected companies’ long-term loans to the total debt ratio is higher than that of non-politically connected companies. This shows that political connections do bring financing convenience to politically connected companies, and especially on the long-term bank loans.Secondly, the empirical results show the negative impact of the political connections on bank loans, but the reputation information role of political connection can significantly improve the bank loans of the negative impact on the firm value.Thirdly, the political connection has a negative effect on firm value. The academia has not reached an agreement on the overall impact on the firm value. Some scholars think that the political connection can improve the external business environment, and then improve the firm value. However, it cannot be ignored that there are many ways political connection affects firm value. Some scholars believe that the establishment of political connection must be paid a high rent-seeking cost, such as the cost of dealing with the government, taking on more business objectives and so on. In general it brings more negative effects than positive effects. Our empirical results show that, on the whole, the political connection has a negative effect on firm value.In this paper, the possible innovations and contributions are mainly in the following three aspects:Firstly, this paper portraits the political connections more specifically.The existing literature on economic consequences of political connections, limited political connection as to whether the chairman, general manager or actual controller is politically connected, but rarely involves the directors including independent directors, and the other executives. This paper considers that, to some extent, the actual controller and the directors take part in strategy making and company management, their political background is likely to impact the performance of the company, so this paper more widely considered the political connections of the company.Secondly, we divided the bank loans into long-term bank loans and short-term bank loans.Most of the existing literature generally studied the political association of total bank loans, not much analysis of the internal structure of the bank loans. So this paper divided the bank loans into long-term bank loans and short-term bank loans and tested the debt maturity structure. Also, we tested the influence of bank loans that political-connected firms obtained on firm value. We find that the political connection is helpful to obtain bank loans, and the financing convenience is mostly shown on the long-term bank loans. We also find that political-connected firms’value is raised because of the bank loans they obtained. Thirdly, this paper studied the relationship among political connections, bank loans, and firm values, which further enrich the empirical research of political connections.The current study is limited in two ways, one is whether the political connections can provide enterprises with the convenient access to economic resources, the other one is the impact of political connections on firm value. Few literatures combine these two aspects. Through the path of bank loans, this paper studied the relationship between political connections and firm value. This will further enrich the existing empirical research on political connections.