Political Connection,Internal Cash Flow And Inefficient Investment

Investment, as one of the troika to promote economic growth, plays an important role for this rapid development momentum; But it was also accompanied by the emergence of non-efficiency investment issues. In the capital markets with non-rational reality and Non-sufficient information, internal cash flow and efficiency of investment of the private corporations have been closely linked. The shortage of internal cash flow often leads to underinvestment; In contrast, the ample of internal cash flow often breeds overinvestment. Therefore, how to suppress underinvestment result from the shortage of internal cash flow and overinvestment result from the ample of internal cash flow to improve operational efficiency and effectiveness of the micro body has become a practical problem which urges us to explore. In recent years, along with the development of private economy, Chinese private corporations establishing political connection has become a common phenomenon, and the relationship between government and enterprises gradually becomes the focus of domestic academic research. However, the impact of political connections on firm value remains inconclusive. So what is the role of the political connection in the end? Does this informal mechanism affect the non-efficiency investment result from the internal cash flow in the enterprises?This paper selects the data of private listed enterprises from the Shanghai and Shenzhen stock markets which’s ultimate controllers are domestic natural person or family during the period of 2009-2013 as the study sample, this study combines both theoretical and empirical research methods. Firstly, it uses financing constraints theory and freedom cash flow theory to analyze how internal cash flow Influence the non-efficiency of corporate investment in private listed companies. Based on the resource-dependence theory, rent-seeking theory and other related theories, this paper further put the political connection into the analysis framework and study how the establishment of political connection affects the relationship between the internal cash flow and the non-efficiency investment. The empirical results show that:(1)The private listed enterprises with shortage of internal cash flow tend to under-invest; the establishment of political connection can help the companies with in-sufficient internal cash flow to mitigate under-investment problem; the stronger the political connection is, the more obvious the mitigation effect will be; (2)The private listed enterprises with abundant cash flow tend to over-invest; the establishment of political connection would exacerbate the over-investment of free cash flow; the stronger the political connection is, the more serious the negative influence becomes. According to the above conclusion, this paper puts forward a number of targeted measures and suggestions from the perspective of enterprises and the government.This paper from overinvestment and underinvestment two aspects to explore its relationship with political connections, it enriches the theory about the relationship between political connection and non-efficiency investment to a certain degree, and provides suggestions to solve the low efficiency of private enterprise investment behavior; At the same time, this study provides a theoretical foundation for the transformation of government functions and improve relevant systems and institutional environment.