Empirical Study On The Effect Of Financial Connections On Private Firms’ Financing Constraints

At present, private enterprises’ financing constraints are quite common in Chinaand need to be resolved as soon as possible. As a result, how to mitigate the financingconstraints of private enterprises attracts more and more scholars to study, and it alsobecomes the focus of authorities. Central Bank has introduced lots of policies in thenear future to reduce small-and medium-sized enterprise’s financing costs, and steadilycarry out reform of the financial system. This paper makes an empirical study on thistopic and put forward some point of the views, perfecting the theoretical system.By sorting out the existing we find out that: the vast majority of researchersconcentrated on the effects and mechanism of system environmentsor politicalconnections of private enterprises on their financing constraints. Few pay attention tofinancial connections, which is defined as the financial background of board members,such as used to work in bank, securities, insurance, trust, funds, and other financialinstitutions. First of all, we focus onwhat influence the financial connections have onfinancial constraints, and its mechanism. Then, we separate it into two specific forms:bank connections and non-bank financial connections. Given that, we compared theirinfluence mechanism and figure out their difference. Furthermore, we pull the systemenvironment into the research framework to prove that financial connection is aneffective substitute for system environment. It can help private enterprises mitigate thefinancing constraints caused by system imperfection. Based on our conclusion, we putforward some political suggestions to accelerate institutional reform, and optimizeexternal environment of private enterprises in China.We employ the non-financial private enterprises listed in Shanghai and Shenzhenstock markets from2005to2010as our research samples. Empirical studies find that:the financial connections are conductive to ease the financialconstraints of the privateenterprise. As a specific form of financialconnections, bank connections have slightlygreater influence on financial constraints. The effect of the financial connectionsalleviate the financial constraints of the private enterprises becomes stronger as theimprovement of system environment.The contributions of this paper are as followings: First of all, as our country is nowbeing in the stage of emerging and transition, there is too much political interference and the state-owned banks dominated the financial system. Most of scholars take bankconnections as financial connections, ignoring non-banking financial connections. Thispaper compared their influence mechanism and figure out their difference.Secondly, we pull the system environment into the research framework to provethat financial connection is an effective substitute for system environment. For the firsttime, we combined government intervention, financial system and legal environment tocomprehensively describe system environment in ChinaFinally, the existing literature still has not reached a consensus on the metric offinancial constraints. Essentially, financing constraints are not just reflected in the easeof raising fund or financing cost. It also can be represented by the debt structure ofprivate enterprises. As a result, we take the debt structure as a metric.