Executives Political Connection And Corporate Cash Level

As a hot topic among academic world, cash holding level is quite an important issue for balancing companies’ surviving and development. For enterprises with easier access to capital, they always correspond with relatively low cash holding level. And vice versa, enterprises with difficulties in financing need to keep high cash holding level to mitigate the constraints from financing.Basing on previous study, executives’ connection with politics has become a substitute of formal institution, which prevails through state-owned enterprises. Such connection will benefit enterprises with plenty of resources, among which is access to bank loans. Here comes the question, what is the correlation between executives’ connection with politics and enterprises’ cash holding level?The samples of this paper are retrieved from non-financial private owned enterprises listed on A-share markets (2004-2010). Through stringent analysis, the main findings are shown as below:Executives’ connection with politics has significant correlation with enterprises’ cash holding level. Owing to political intervention of banking credit allocation, executives could keep lower cash level for having less constraints of external financing under existing government dominant system. However, this paper has indicated a positive correlation between the two entities mentioned above. As a result of the agency problem, executives having more connection with politics would also prefer more liquidity, corresponding with higher cash holding level.The financial environment of enterprises will also influence the relationship between executives’ connection to politics and enterprises’ cashing level. Executives’ political connection would have greater positive impact on cashing level in relatively un-developed districts. This is because relationship will substitute market itself in consolidating capital allocation in un-developed environment, where access to capital is more limited and market efficiency is lower owing to stronger government intervention.The legal system where enterprises exist also influence the relationship between executives’connection to politics and enterprises’cashing holding level. Relative to places with better legal system, executives will prefer higher cash levels if they have stronger political connection. Governments will enhance their intervention to banking credit system if higher corruption and worse legal transparency, which leads to executives’stronger political connection to fully use leverage impact. Meanwhile, political connection will also mitigate enterprises’ operating risk, which benefits enterprises to have more access to banking resources.Owing to serious agency problem, executives often abuse capital for personal benefit pursuing. For enterprises that having weaker agency problems, shareholders’ interest or maximizing enterprises’value will.become executives’core objective. When enterprises obtained enough capital, they will sort to have weaker motivation to mitigate external financing constraints and this will also weaken capital structure efficiency. Executives will then react with lowing enterprises’cashing level to maximize corporate value.According to previous study, difficulty in accessing to capital is the main cause of high cashing level among China enterprises. However, the findings of this paper have shown a controversy paradox as high cash level would also support easier cash access. This paper has provided a new sight on studying enterprises’financial condition basing on executives’political connection. Meanwhile, the paper also provides support for strengthening existing institutional financing monitoring system.