Market Liberalizaton, Political Connection And Corporate Risk-taking

With over30years of economic transformation，the private enterprises haveincreasingly grown strong and developed an important force in national economicdevelopment of our country. However，because of various institutional defects such asimperfect legal system，incomplete financial system and weak property protectionsystem，the development of private enterprises is in difficulty. In that case， privateenterprises establish political connection with droves，and entrepreneurs grow moreand more enthusiastic about politics. Political connection can serve as resources andbring many benefits to enterprises such as less financial constraints，and morepreferential policies，which can, to some extent，ease the hindering effect on theprivate enterprises brought by institutional defect. However, political connection isnaturally relative to government intervention. Political connection can reduce the“Rent-seeking”cost between the government and private enterprises. To realizeeconomic growth goals， the government will require the politically-connectedenterprises to bear more policy burden，which may lead to an absence of abilityconstruction and a decline in the level of risk-taking，making the private enterpriseslack innovation and exerting bad influences on the sustainable development ofenterprises.Risk-taking reflects the choice of investment projects in the investmentdecision-making process， is an important decision in enterprise financial behavior.Risk-taking help increase R&D investment，enhance the enthusiasm of innovation，accelerate capital accumulation and improve business value. To seek lucrativeinvestment opportunities，enterprises are ready to take risks，which contributes tolong-term economic growth. Most existing literature analyzes influence factors ofrisk-taking from the perspective of external institution and internal governancemechanism，but least from the perspective of political connection. Based on thespecial system environment during the economic conversion period and universalfeatures of political connection，this paper tries to put forward the following twoquestions: firstly，has political connection significantly reduced the risk-taking levelof private enterprises，and whether the risk-taking level significantly falls whilepolitical connection becomes closer；secondly，whether the effect on risk-taking level from political connection significantly varies with the process ofmarketization.Specifically，in the fastest growing region in the marketization processand associated political risks, there is no significant impact on the level of privateenterprises，and in the marketing process is slow，politically unpalatable Councilsignificantly reduced risk exposure level of a private enterprise.Using the data of China’s A-share private listed companies from2009to2010，we study the influence political connection makes on risk-taking level，and analyzewhether this influence varies with the process of marketlization. The evidences showthat the risk-taking level of private companies with political connection issignificantly lower than that of private companies without political connection，andthat risk-taking level falls while political connection becomes closer. The study alsofinds that the effect on risk-taking level of political connection significantly varieswith the process of marketization，that is，in places where marketiztion makes rapidprogress, political connection generally reduces risk-taking level, but not significantly.However，this effect can be quite significant in places where marketiztion makes slowprogress. This study not only deepens our cognition to the economic results ofpolitical connection of private companies，but also has implications for speeding upthe process of marketization and transforming government functions.