Empirical Research On Risk-taking Behavior Of Chinese Central Government Affiliated Firms: Based On Political Connections And Executives’ Incentives

Since the reform and opening up, China has went through rapid economic development. The market economic system has been gradually improved, Chinese central government affiliated firms continue to develop and expand. At the same time, Chinese central government affiliated firms are facing increasing competition. In order to ensure their own development, the central enterprises need to invest and develop, which will inevitably produce a certain risk. Therefore, in a long-term perspective, companies should analyze the external and internal environment, select the appropriate investment projects.The purpose of risk taking is to enhance the value of companies. Risk-taking behavior is expected to elect some positive cash flow projects for companies. The study of Chinese central government affiliated firms’ risk-taking behavior is necessary. Which factor should be included in the risk-taking behavior model? First, the association between government and the Central State-funded enterprises provides a perspective. These firms are set up by the government, which makes them obtain a lot of support from the government. Secondly, we choose the angle of Principal-agent theory. In China, a way to solve the principal-agent problem is the executive equity incentive. This can not only retain and encourage talented senior executives to serve the enterprise, but also effectively avoid or reduce the risk of profits loss. In addition, the interaction between firms’ political ranking and executives’ political connections can also affect the risk-taking behavior.Therefore, independent variables include the central enterprises administrative level, the general manager’s age, the executive’s equity incentive and political connections. And the dependent variable is risk taking. This paper takes the central government affiliated enterprises and their listed companies as a sample. The period covers from 2003 to 2014. The empirical results show that the correlation between the central administrative level and the risk taking is positive. Moreover, the age of general manager has lower negative impact on risk taking, and it may affect other independent variables’ regression results. Thirdly, the proportion of executives’stake holding may increase risk taking. Finally, the political connections of general manager does not affect risk taking independently.In this paper, the significance of this study lies in two aspects:in theory, it can enrich the company’s risk-taking research results; in practice, it helps to optimize risk-taking behavior of central enterprises.The framework of this study is as follow:The first chapter is the introduction. Firstly, the topic of this article is proposed, then the background and significance of this research are elaborated, and then it introduces the framework and structure of the paper. At last, it points out the innovation of this article.Chapter two is the review of researches. It describes the current domestic and foreign relevant theory. This section provides a reference for research methods and angles of this article. As well as by comparing the results of previous research, it can highlight the innovation of this paper.The third chapter is the basis of relevant theories and concepts. This chapter introduces the concept of risk taking, illustrating that risk taking is the opportunities to pursue better market opportunities. Secondly, it introduces principal-agent theory briefly. Thirdly, the concept of Chinese central government affiliated firms is defined, and the administrative level of these firms is explained. Then, we introduce the range of executives and their characteristics. Finally, the central enterprises executives’ equity incentives and political incentives are presented.The fourth chapter is the theoretical analysis and the research hypothesis. This chapter first describes the effects of the central administrative level to risk taking, indicating that the existence of administrative level is objective and can bring enormous human, financial and material support to Chinese central government affiliated firms. Then this paper analyzes the effect of executives’ age. Since the executives are in Central State-funded enterprises, they are not only likely to win re-election in the enterprise, but also be politically promoted. In order to quickly gain the promotion, executives may be more aggressive to the high-risk project, which causes negative correlation between the age and the risk. The third hypothesis analyses the positive impact of the equity incentive. Finally, the positive impact of general manager political connections is proposed.The fifth chapter is the empirical design and testing. The sample includes the central enterprises and its subsidiaries from 2003 to 2014. According to then design hypotheses of the model, three regression models are put forward. Then on the basis of regressing results, this paper analyses the impact of administrative level and executive incentive in the whole samples and sub-samples divided by administrative level respectively.The sixth chapter is the conclusions and recommendations for improvement. The part of this study summarizes this whole paper, makes recommendations based on the research findings, then points out the direction of further improvement.Compared with the previous literature, the contributions of this paper are as follows.First, it enriches the study of political association between Chinese central government affiliated firms and the government. Since these companies are state-owned, many people may take the relationship between government and firms for granted. In fact, this seemingly inevitable connection brings a lot of convenience to Chinese central government affiliated firms. This article will introduce the central enterprises’ administrative level into regression.Second, this study helps to find out the factors that affect the risk-taking behavior of Chinese central government affiliated firms. These factors are divided into the political connection and the executive incentive.There are also some limitations of this study. Firstly, only the political connection and the executive incentive are included in the regressing model. There are some other factors not being considered. Secondly, in 2015, the term payment has been put forward in the Central Management Enterprises’ payment reform, required further follow-up study in the future.