Research On The Debt Costs Of Private Enterprises Affected By Political Connections

Under the existing institutional circumstances, establishing political relationswith the government are beneficial for private firms to obtain the competing resources,such as getting more bank loans and longer loan maturity. For private enterprises, theexternal institutional factors may affect its debt costs. So what makes us curious is,whether the political connections of private firms have the debt cost, thereby helpingpolitical connected private firms to finance with relatively low debt costs.For solving the question, taking as the specimens the private direct listed A-sharefirms in China from2008to2011, this paper gives a theoretical analysis and empiricaltest on the correlation between the political connections of private firms and theirdebt costs. The research result of this paper shows that, under the financingenvironment of private firms’ debt costs discrimination, private enterprises’ politicalconnections do have the debt cost effect, which helps the political connected privateenterprises financing with relatively low debt costs through the signal transmissionmechanism and the government implicit guarantee mechanism. Moreover, the furtherempirical result shows that, compared to big companies or firms located in goodinstitutional environment, the debt costs of political connections are more significantto minor enterprises or to firms located in bad institutional environment.Debt cost effect of political connections to firms is closely related with privateenterprises’ severe financing environment with no doubt. Therefore, the policy makersshould take some measures, which includes establishing a more equitable competitionmechanism for private firms, deepening the financial system reform sequentiallythrough the way of encouraging the development of joint-stock commercial banks andother financial institutions, reducing the barriers to entry of private capital into thefinancial industry, etc, so as to provide a better formal institution guarantee to privatefirms’ development and then improve private enterprises’ debt financing situationsfundamentally.