Research On The Impacts Of Political Connections On Corporate Over-Investment

In these years, non-efficiency investment has always been the central problem concerned by academia. Most of available study attribute over investment of entrepreneur to principal-agent problem and information asymmetry, while a few study considered influence of executives’characteristics on entrepreneur investment. However, it is far from enough to explain over investment among Chinese entrepreneur just in these two ways. Political background and economic policies of China should be concerned when analyzing over investment problem. China is still in economy transformation, its policies regulating financial market and company still need to improve, in this way, most of scarce resource are controlled by government, which play a role of social resource administer in macro environment and a role of company regulator in micro market. Market power and government power exist at the same time, distributing resource together, in this situation, connection between government and entrepreneur can have a significant influence on investment of entrepreneur.High-level connection with government is prevalent among Chinese listed companies. Since China has a special political background, state-owned companies were naturally linked to government at the very beginning. Because of such connection, state-owned companies get an important advantage of acquiring resource. On the other hand, private companies are trying to make up for their natural disadvantages. To avoid negative impact of government on acquiring resource and daily running, private companies strongly tend to set up and then keep the connection with government. In long term, private companies will get more and more dependent on such connection. According to research, such motivation to make up for disadvantage of private companies becomes more obvious in regions where financial market is less developed, government regulator is frequent, unofficial tax burden is heavy, jurisdiction is less powerful (Chen, Lin, Su,2005; Li, Ming, Zhang,2006). However, companies would inevitably be influenced by government when developing connection with government. Government, on the other hand, may also interfere on companies’ business, which is beneficial for government’s political goal or even officer’s benefit. In this way, companies’ efficiency and operating will be influenced. Overinvesting is among the most common negative influenced on companies by governments.On the other hand, state-owned companies have natural connection with government, which make it difficult to understand what leads its overinvesting, either connection between executives and politics or mangers’ government background may lead to such overinvesting. However, private companies are not directly interfered by government and don’t need to shoulder society responsibility. So this paper mainly studies private listed companies, which make analysis meaningful and practically useful.Besides, comparing with national government, local government officers need to pursue political goal, concern personal achievement and deal with local fiscal expenditure. In this way, they have stronger motivation to promote companies to expand investment, which improve local financial income and GDP. In this circumstance, private companies may increase their investment and expand business size, because they have to submit to government to keep the connection with government. As a result, problem of overinvesting arises. Considering this situation, it is necessary to subdivide different political connections, so we can study how these connections influence overinvesting in different ways.Considering all above, this paper makes empirical study on the influence of political connection on companies’ overinvesting, based on the data of private listed companies in Shanghai and Shenzhen Stock Exchange. This paper also makes subdivisions on each company’s political connection, then study how the connection of executives with national government or local government influences overinvesting respectively. The conclusion shows two points, firstly, executives’ political connection has a significantly positive interrelation with their companies’ overinvesting; secondly, connection with local government has a more important influence on overinvesting than that of connection with national government.This paper consists of six main parts, each part as follows. The first part is introduction. This part firstly points out the background and meaning of this study. Then it displays this paper’s thinking and its outline, as well as its creative and fresh stuff.The second part is review of literature. This part firstly discusses available literature home and abroad about political connection and overinvesting of companies. On this basis, this paper concludes present achievements of literature and forecasts trend of future study on such topic.The third part is theoretical analysis and assumption. This part firstly makes theoretical analysis on why private companies set up and keep political connection, and analysis on how political connection influence companies’investing decision. Finally, this part put forwards assumption of following study.The forth part is research process. This part mainly describes the process of empirical study in detail. The process includes choosing sample to study, refining data with certain methods, building regression model. This paper explains the definition and meaning of each variable.The fifth part is conclusion from empirical study. This part is mainly about statistical description and interrelation test of variables, the regression test of model, and robustness test, which support the conclusion strongly.The sixth part is conclusion and suggestion. Based on analysis above, this part gives the final conclusion and points out the weakness within this study. Furthermore, this part also forecast trend of future study.Insight of this paper is rather creative and innovative. For studying overinvesting problem among companies, this paper takes companies’political connection into consideration, extending research on this issue further. While this paper has some weakness, further improvement is needed. The biggest weakness is measuring political connection with virtual variable, which cannot fully describe the complicated political connection of executives.