An Empirical Study On Institutional Environment,Political Connection And Over-investment Of Chinese Private Enterprises

In recent years, China’s private economy has achieved a rapid growth and has played animportant role in the sustained and fast development of national economy. So, studies on theissues of China’s private economy’s development is of great importance. Regarded as aninformal institution, Political Connection is widespread around the world and has become ahotspot in the field of Law and Finance. Corporate investment behavior and efficiency has adirect impact on corporate value, and inefficient investment will lead to underperformance inthe long run. Several studies has found political connection will result in over-investment. Onthis basis, thesis first distinguishes different types of political connection, and studies thedifference on their effects on over-investment. In the process of China’s economictransformation, the regional differences are obvious, especially in government intervention,financial development and legal construction. Institutional environment has become animportant factor in the development of the private economy. Therefore, thesis next puts theinstitutional factors into the model, and tests how the institutional factors will influence theeffect of political connection on overinvestment among Chinese private enterprises.A company is defined as political connected if its chairman or CEO is or was a governmentofficial, NPC representative or CPPCC member. The sample includes1,242listed privatecorporations, among which302are political connected companies. Firstly, based on Richardson(2006) model, test the effect of political connection on over-investment using full sample. Then,separate central or local political connection, chairman or CEO political connection, and testthe relation between different types of political connection and over-investment. Thirdly, addinstitutional factors into the model and test the effect of institutional environment on the relationbetween political connection and over-investment.The empirical results indicate that:(1) political connection is widespread among China’sprivate listed firms, accounted for about24.30%, and institutional environment has influencedthe distribution of political connection;(2) the coefficient of political connection and over- investment is highly positive significant using full sample, local sample and chairman sample,and the slope turns even steeper using local political connection sample, but not significantusing central sample and CEO sample;(3)considering institutional environment, the lowermarketization degree or the higher government intervention degree is, the more severe theoverinvestment of political related firms is. But the effect of financial development level andlegal construction is not significant.