Political Connections, Financial Liabilities And Enterprise Value

With the continuous deepening of China's reform, private enterprises have developed rapidly, and have made important contributions to the country's economic growth; the management and development of the private enterprises are also getting more and more attention. Now our country is in the special period of economic transition, market mechanism, legal mechanism and so on are still not perfect, this leads to the policy discrimination against private enterprises always exists, which makes it difficult for private enterprises to develop. In order to seek development, private enterprises will actively seek for alternative mechanisms for the formal system, and political connection is such an alternative mechanism. Political connection, as an informal system, can affect the operation of private enterprises from debt financing, tax incentives, corporate governance and other aspects; it will ultimately affect the value of private enterprises.Through literature review and theoretical analysis, we can know that the existing literature have studied the relationship between the political connections and the loan financing of the private enterprises, as well as the relationship between the political connection and enterprise value. But there is no literature to study the relationship between the political connections and private enterprises' loan financing from the perspective of liabilities, also it ignores the relationship between the financing effect of political connections and enterprise value. However financial liabilities have great significance to the development of the enterprises, they can constraint inefficient investment behavior of enterprise executives and play the role of signal transmission, to a certain extent, they can also solve the problem of information asymmetry. Thus, combined with China's special institutional background and relevant theoretical basis, this essay empirically tests the effect of political connections on the enterprise debt financing from the perspective of financial liabilities with the sample of Chinese A-share private enterprises listed during 2007-2012. The empirical results show that:(1) The private enterprises with political connections could obtain more financial liabilities, especially long-term financial liabilities.(2) Such effect that private enterprises with political connections could obtain more financial liabilities it's not affected by the enterprise scale.(3)Such effect that private enterprises with political connections could obtain more financial liabilities is more significant in the western region of lower degree marketization.(4) The financing effect of political connections(to help private enterprises obtained more financial liabilities) will damage the value of enterprises, and whether long-term financial liabilities or short-term financial liabilities will have a negative effect on the enterprise value, which is also verified the rent-seeking theory of political connections.(5) The financing effect of political connections is more obvious in large scale enterprises, and the performance is not obvious in small scale enterprises.This shows that political connections are conductive to the obtainment of private enterprises' debt., but due to the special institutional background in China, private enterprises bear the cost of rent-seeking of the government, or lack of rational use of these funds(i.e. funds are used on the non-efficiency investment), the financing effect of political connection will damage the enterprise value. The conclusions of the research is helpful to the optimization of the private enterprise's financing decisions and provides a new perspective to the further understanding of political association's influence on the social resource allocation efficiency, they also provide a theoretical basis for the formulation of government policy and the establishment of relevant reform system.