Political Geography, Financing Cost And Expansion

Based on both extensive anecdotal evidence and on a number of academic studies, the relevance of politics in finance is widely accepted. Doing financial research from political geography angle is a new perspective to study politics and finance problem. Foreign scholars have done some attempts, while it is seldom dealt among Chinese scholars.Therefore, this paper enriches the literature on political geography with certain theoretical significance. In addition, China is a typical "society of human relationship" and also a society with "official rank standard". The relationship between politics and finance, officials and enterprises has its own characteristics. In such a society, political connections and social network become important factors that influence social resource allocation and firm investment behaviors. Therefore, this paper helps people understand the influence of political factors with Chinese characteristics on finance, with certain practical significance.Political geography is the micro-level political connections and various social relations on district level and will exert an influence on company behaviors. This paper constructs Political Power Index (PPI) by collecting the information of officials’ birth places manually. Based on this, I take China listed companies as sample and firstly study the impact of political geography on their debt financing behaviors, including financial leverage and debt financing cost. Secondly, I investigate the influence of political geography on firm expansion behaviors. The results show that those companies with higher PPI will finance themselves more by debt, thus having higher leverage and their cost of debt is lower, which exists only in non-state-owned enterprises. In addition, I find empirically that political power can promote firm expansion, which is more obvious in non-state-owned enterprises.The main innovations lie in the following aspects. First of all, this article innovatively constructs PPI as the measure of political geography. Secondly, this paper expands the study of political connections from interpersonal level to regional level and combines political connections with social relationship to explain the influence of political geography on company behaviors. Lastly, the researches on political geography and firm expansion are rare in both foreign and domestic literature. This paper enriches the literature on firm expansion and helps to interpret firms’ expansion behaviors and motivations from the perspective of politics.