Political Connection, Overconfidence And Risk-taking-Empirical Analysis Based On The Private ListedCompanies In China

In modern financial management, investment and financing are two decisions must be made by corporates. Investment activity is to configure the companies’ limited resources owned by themselves. Financing activity is to effectively raising capital which through the financing channels and financial markets, following the enterprise production and operation. When enterprises making this two decisions, they will face and bear the risk, which is the basis for value creation. Enterprise risk problems not only raise the attention in the practical realm, it has also been extensively studied in theory. Scholars have carried out extensive discussion in risk factors and the consequences attendant. According to previous studies, managers of private listed companies involved in business management, making important decisions of investment and financing which exist inevitable connection with risk level of the enterprise.The private companies will meet various difficulties in the course of their own development due to deficiency of congenital condition and restrictions and interventions of government. To seek the resources for the development of the companies, the private companies often seek some relationship with the government. The political connection is the bond between the private companies and the government. Actual controllers get the support of the government through the political connection. The research studies the relationship between the political connections of actual controllers and the risk taking level of the private companies. The study deeply explores the impact mechanism of political connection on the level of risk taking of private enterprises by adding over confidence theory in behavioral finance theory, and provides a certain theoretical and empirical support for exploring the source of risk for private companies.Base on the data of private listing corporation in A shares in Shanghai and Shenzhen among 2010 to 2013, the study deeply analysis how political connection of actual controllers affect the rick level of private corporation. The earnings volatility is used as the indicator of risk level of corporation, and forecast net profit growth rate is used as the over confidence. The results shows that political connection of actual controllers will cause the over confidence. The higher of their political level, the more prone to excessive over confidence. The political connection of actual controllers will raise the risk level. The higher of their political level, the risk taking level is high. Finally, political connection of actual controllers affects the rick level of private corporations by intermediary variable of over confidence. The political connection of actual controllers will lead to over confidence, and then raise the level of risk taking. Besides, we also use the relevant data of the chairman of the private corporation to test the robustness in this paper.The empirical study obtained significant results which have important significance. Not only study the risk taking formation mechanism of private corporations in the term of political connection, but also provides a management direction of analyzing risk and making important decisions.