An Empirical Study Of The Relationship Between The Political Connection And SME Debt Financing

From the capital structure and many investigating results, we find the SME debt financing is a serious problem. Even though the central government formulates many policies in past ten years, it can not solve the financing problem because of institutional defect or the wrong guidance. We study the relationship between political connection and the SME debt financing in view of our special market environment and institutional background, to verify whether political connection increase the chance of SME financing and whether this action mechanism disturbs market operation.First, we make a literature review about the SME debt financing and political connection, then, study the political connection action mechanism in the market and analyze the political connection’s effect on SME debt financing. Also, we make a regressive analysis of the effect of political connection on SME debt financing.The results shows that political connection helps SME get more bank loan, longer credit period and lower loan cost. Furthermore, we find this impact more serious in poorly financing developed, lower rule of law and serious government intervention areas.Even though political connection can alleviate the SME debt financing predicament, capital allocation by political connection is informal and produces unfair competition in SME, result in seeking rent and induce corrupt. So, we must build more perfect institution to release the SME financing dilemma. First, we should promote the trend of liberalization of interest rate, which increase the competence in financial market, improve the efficiency of management of bank. Second, reforming the credit mechanism, establishing the credit guarantee system, perfecting the direct finance system, pushing forward the private finance institution developments are necessary.