Political Connection, Investment Efficiency And Corporate Value

Political connection is a common phenomenon in the process of economic development, and have become a hot topic of finance research in recent years. In China, a number of private enterprises have a complex political connection with government. This relationship may affect many aspects of business operation, and affect the firm value ultimately. This paper make a focus study on what influence that political connection bring to firm value, and make an analysis on the impact of investment efficiency, an affect channel of political connection and firm value.The results show that political connection will produce a negative impact on firm value. Especially in backward countries or regions with more government intervention, weaker legal protection of private property rights or lagging financial markets, the government will have a greater control on resource, and the grabbing hand following political connections is more pronounced. That illustrate that the impact of political connection to the enterprise value is affected by the level of the institution development.To discuss the action mechanism of the political connection, the paper introduces the investment efficiency as an affect channel of the political connection impaction in research. The empirical results show that the establishment of political connection with the government lead to a lower invest efficiency, the interaction term of invest efficiency and political connection is significantly negative, indicates that political connection have an impairment on the firm values by reduce the invest efficiency.For a further test on our results, this paper divides private firms into direct listed firms and indirect listed firms, then analyzes the relationship between political connections and firm value by group. The results indicates that although the political connection make a different influence on the private enterprise listed by different way, it supported the hypothesis that political connection have a negative impact on enterprise value. That conclusion supports the view of the political connection is inefficiency to resource allocation, and provides some references to private corporates and government.