The Effect Mechanism Of Political Connection And The Over-Investment In Enterprises

In recent years, with the rapid development of Chinese economy and the emerging phenomenon of business expansion, the phrase "hungry and inefficient" has become a true portrayal of Chinese enterprise investment status. Along with economic development, the issue of inefficient enterprise investment has become more and more prominent, attracting growing concerns from academics. However, most studies on over-investment are from the angle of enterprise governance structure, without taking institutional factors into account. Political connections have been a hot spot in academic research. What’s more, this phenomenon is common in developing countries, and China is going through a long-term economic restructuring period. Under this macro-background, there is some academic significance of research such as whether political connections will affect enterprise over-investment behavior? How will it affect enterprise over-investment behavior?The paper mainly studies the mechanism of political connections towards enterprise over-investment behavior. First, it not only carries out domestic and foreign literature review, but also clarifies current academic achievements. Combining with a variety of related theories, it builds a theoretical framework. Based on the previous studies, it analyzes inner mechanism between political connections, manager’s over-confidence, free cash flow and over-investment behavior. Next, by selecting main board listed companies in Shanghai and Shenzhen A-shares market in 2011-2013 as research samples, basing on pre-set model, there are following conclusions being made through empirical analysis: political connections play a significant role in promoting over-investment behavior; meantime, there is a positive correlation between political connections and manager’s over-confidence, free cash flow; there is also a positive correlation between over-investment and manager’s over-confidence, free cash flow. Through further examination, it shows that manager’s over-confidence, free cash flow play a partial mediating role in the effects of political connections towards over-investment behavior. The political connections may in part affect over-investment in a positive way through manager’s over-confident, free cash flow. Finally, based on the theoretical analysis and empirical conclusion of this paper, combined with China’s special institutional background, relevant advices and suggestions are provided for the persons concerned to draw reference.