Political Connection, Earnings Quality And Investment Efficiency

Investment as an important way of resource allocation, it is important to macroeconomic growth and micro-enterprises development. For micro-enterprises, investment is an important part of business formation and allocation of resources, it has an impact on corporate financing policies and allocation policies, and ultimately it will affect shareholder wealth and enterprise value. However, due to the presence of asymmetric information and principal agent, there is no perfect capital market. It forces companies to make investment decisions that deviate from the optimal size and direction, then it results in inefficient investment, wasting resources and income volatility, and ultimately it will affect investment efficiency. In China, with the deepening of reform, the private economy has become an indispensable part of the market economy. It plays an important role in increasing employment opportunities, creating revenue, providing wealth and maintaining social stability. The level of private enterprises’investment efficiency affects the efficiency of the overall capital allocation largely. But in recent years, the behavior of Chinese private enterprises is irregularities; some companies expand business scales blindly that brings about overinvestment, some companies lack of funds that lead to underinvestment. Overinvestment and underinvestment all will lead to inefficient investment. So it is significant for us to have a study on the investment efficiency of Chinese private listed companies because it can provide theoretical support for the reform and development of China’s national economy.China is in a period of economic restructuring, in particular economic background, the government holds an important resource. Compared with the state-owned enterprises, private enterprises are facing more constraints; problems faced in the investment process are also more and more complex. In order to obtain favorable resources, private enterprises actively establish various political connections associated with different levels of government. Research shows that, through the political connection, private companies can get more tax incentives, credit support and policy preferences. Research on political connection and investment efficiency are mainly concentrated in the direct impact, the few studies are concentrated on its indirect impact. Foreign researches show that earnings quality has control effect, it can alleviate the agency conflicts, reduce information asymmetry, and high-quality earnings can curb overinvestment, at the same time it can be able to alleviate underinvestment. But this conclusion is based on the western developed capital markets. In the context of our particular system, especially under the influence of political connection, many key resources will not be configured by the market, then how will the political connection affect governance effect of earnings quality? In the end, it will weaken the effect or strengthen the effect that the earnings quality to investment efficiency.In this paper, the methods are theoretical analysis and empirical analysis. In the part of theoretical analysis, we review the relevant literature, and then organize the formation of research ideas, and then define political connection, earnings quality and investment efficiency, and then learn from principal-agent theory, asymmetric information theory and resource dependence theory as the theoretical basis for this article. In order to explain the arising reason of overinvestment and underinvestment, we reference principal-agent theory and asymmetric information theory. In order to explain the arising reason of political connection, we reference resource dependence theory. On the basis of these theories, we analyze the mechanism that earnings quality to investment efficiency and the relationship of political connection, earning quality and investment efficiency, and then we put forward hypotheses. In the part of empirical analysis, we learn from Richardson Model and Modified DD Model to measure investment efficiency and earning quality. We use dummy variable to measure political connection. To the other factors, we choose the main factors as the control variables. In this paper, we select 2011-2013 private-owned listed companies for the study, combined 2009-2013 data, through a series of procedures; at last we obtain 1897 samples. In the paper, our research purposes are to study the direct impact that earnings quality to investment efficiency, and the political connection indirect effects to investment efficiency through the middle variable of earnings quality. The results show that:(1)Private-owned listed companies have significant inefficient investment behavior; the situation of underinvestment is more serious. After the financial crisis, our country has tightened monetary policy, limited bank lending, and at the same time, banks prefer to lend to state-owned enterprises funds, so private enterprises face financing difficulties, leading to lack funds and underinvestment.(2)Earnings Quality can curb overinvestment, and it can ease underinvestment. We can consider the impact that earnings quality to investment efficiency from three perspectives:Based on resource allocation perspective, earnings quality has a direct impact on business investment; based on market pricing perspective, earnings quality can alleviate information asymmetries, reduce financing costs, and thereby improve the investment efficiency.(3)Through the middle variable of earnings quality, political connection significantly weakened the inhibition that earnings quality to overinvestment and it significantly weakened the alleviation that earnings quality to underinvestment. It needs costs to establish and maintain political connection. To conceal these costs, managers have an incentive to provide false financial information to the external information users. This action can exacerbate agency problems; reduce the impact that earnings quality improves investment efficiency.Although this article does not directly study the direct affect that political connection to investment efficiency, from the regression result, we can find that political connection has a positive impact on the investment efficiency, but the effect is not significant.Based on the study results, we make relevant suggestions, while we also recognize the deficiencies that exist in this study.