The Research On The Effect Of Political Connections On Inefficient Investment Of Private Enterprises

The relationship between government and market deeply influences enterpriseslong-term decisions. In recent years, with the deepening of China’s economic andsocial transformation, exploring the relationship between government and ent erprisebecomes a hotspot in fields of transition countries development. In the background oflow legal protection mechanism, financial repression, ownership discrimination,private enterprises are able to get today’s achievements, informal mechanisms arethought to play a key role, while political connection is a representative one. Studieshave found that, political connections brought enterprises for resources, protection ofproperty rights, and became alternative in the absence of formal regime. But for theactual performance, because of the differences of institutional environment, economicdevelopment and the culture, political connections had different effects on enterprises,and formed two effects,"the support hand " and "the grabbing hand".In accordance with finance, investment and value realization, this paper analyzehow political connections affect the inefficient investment of enterprises. Based on thesystematic analysis of the domestic and international literature about politicalrelationship and corporate investment efficiency, we explores the influence ofpolitical connections of private enterprises on corporates overinvestment andunderinvestment, combining the internal cash flow and bank credit. In empirical part,we select2007-2012domestic listed private enterprises by IPO as objects, then webuild regression models to test these hypotheses.The results show that, political connections obviously affect the inefficientinvestment behavior of private enterprises. Political connections of private enterpriseshelp them reduce their dependence on the internal cash flow and short-term loans, toalleviate the underinvestment. Local political connections are stronger, theunderinvestment is easier to ease. compared to local political connections, the centralpolitical connections can ease enterprise underinvestment significant ly. But politicalconnections easily lead to the overinvestment of free cash flow and Long term bankloans. These private enterprises which own local political connections have moreserious overinvestment by free cash flow. local political connections are stronger,overinvestment are more serious. and enterprises exist central political connectionsare more likely to use long-term loans to overinvest. studies also find that, with the improvement of institutional environment, the overinvestment behavior of politicalconnection enterprises by free cash flow and bank credit can be relieved. But forunderinvestment enterprises, as an important "reputation" and "relationship"mechanism, political connections can bring them long term bank loans and othercredit channels to alleviate the problem of insufficient investment.