Political Connection、Capital Structure And Loss-reversal

The further development of market economy has brought unlimited business opportunities for Chinese enterprises, but also makes enterprises exposed to more risk. In recent years, parts of enterprises in our country have the emergence of cash flow problems, operating dilemma or other difficulties because of the poor management or adversely affected by external factors. Meanwhile, in order to regulate the capital market, the securities regulatory commission (CSRC) strives for improving the delisting mechanism to strengthen the supervision and punishment of the loss companies. Once lost the listing qualifications, the loss enterprises will be cleared out from the stock-market and lose equity financing qualifications. And it is difficult to re-gain the trust of market investors; it’s undoubtedly a "fatal blow" for the loss companies. In order to severe punishment from CSRC and keep the precious "shell" qualification, the loss enterprises must turn into profit in a short time. Debt financing is not only as a financing decision, but also an important corporate governance mechanism. The classical capital structure theory says there is an optimal capital structure, where the debt management plays the maximum effectiveness and the enterprises realize the value maximization. It is crucial for the loss corporate to optimize the internal capital structure, improve the level of corporate governance. Under the special transition background of China, the survival and development of enterprises is closely related with the government. Political connection exists generally in enterprise of China. As an important external governance mechanism, political connection can compensate for the system defects. This paper mainly studies two issues:what influence the political association produced for loss companies and how to produce influence on loss companies.In order to explore the internal and external governance mechanism of loss companies in China, this article selects 528 loss samples in the Shanghai and Shenzhen Stock Exchange from 2009-2012 years. And we selected the relevant data from the CSMAR database and corporate annual report in cninfo Advisory Network. Then set up the multivariate linear regression equation and use the software of Stata12.0, Excel for statistical analysis. We respectively examine the impact of political association on capital structure; the impact of capital structure on the extent of the loss reversal; the impact of political association on the sensitivity associated the capital structure with the loss reverse. Some significant conclusions are obtained:First, debt financing of China’s loss companies in general plays a positive role in debt management, asset-liability ratio was positively correlated with the degree of loss reversal; Second, political association is widespread in the loss enterprises in our country, political connection can alleviate the financing constraints of the enterprises, the loss enterprises tend to adopt the debt restructuring or achieve government subsidies to turnaround, the capital structure level is consequently declined, namely, political connection is negatively related to the capital structure; Third, political connection plays a positive effect of debt governance and increases the sensitivity of capital structure and loss reversal degree; Forth, after further distinguishing the political connection strength and category, we find that the stronger the political connection strength is, the greater the effect of debt governance is, at the same time, the debt governance effect mainly comes from the local association other than the central association. Finally, according to the research findings, this paper put forward a series of policy recommendations from internal and external perspective. (1) to deepen market reforms and transform government functions;(2) to improve corporate governance and achieve self-break; (3) to develop financial market and strengthen the debt management;(4)to improve the bankruptcy procedure and strengthen law enforcement. In order to help loss enterprises get rid of financial distress and improve our capital market.