Research On The Influence Of Political Connection On Capital Cost

Since the reform and opening up,China's economy has been developing rapidly,and the enterprises have been growing.Resources are crucial to the development of enterprises.The perfect legal system and financial system can improve the efficiency of resource allocation.As the largest developing country in the world,China's financial system and legal system are not perfect,which makes the enterprise in the process of obtaining the resources needed for development is in a disadvantageous position.Taking into account the long-term development of enterprises,corporate executives in the government as CPPCC members,deputies and other duties,and the government to establish a political connection,access to government support and protection.Under the existing system in China,companies are willing to spend a certain amount of money and time to establish a certain relationship with the government,so that enterprises can get a lot of economic benefits.Political association of enterprises can gain competitive resources from the government,to obtain preferential tax,get more and longer term bank loans,send a positive signal to the market,get some financial assistance from the government in financial trouble.Companies with access to resources will also help the government achieve some goals,such as solving the employment problem.Political association is a kind of informal institution,which can make up for the defects of formal system.Political association reaction to the capital market,will bring about a certain risk,thus affecting the investor's required rate of return,capital cost effect,which is the key to solve the problem.This paper is divided into six chapters.The first chapter is the introduction;the second chapter is the literature review of the relevant literature,political association and the cost of capital were carried out;the third chapter is the theoretical basis,mainly introduces the rent-seeking theory,government intervention theory,asymmetric information theory,signal transmission theory;the fourth chapter is the theoretical analysis and research hypothesis,based on theoretical analysis on the political association and capital cost hypothesis;the fifth chapter is the empirical analysis,the research sample is China's 2007-2014 all A shares of listed companies,excluding the financial industry and the insurance industry data,using descriptive statistics,correlation analysis,regression analysis and other means of testing the relationship between political connection and the cost of capital;the sixth chapter is conclusion,it summarizes the conclusions,recommendations and limitations.The main conclusions of this paper include:First,political connections can provide benefits for the development of enterprises.As an informal system,political association can make up for the defects and deficiencies of the formal system,enhance the competitiveness of enterprises,and provide competitive resources for the development of enterprises.In the capital market,the enterprises with political connections can transmit positive signals to the shareholders and creditors,gain their trust and influence their decision making.Second,this paper empirically tests the influence of political connections on the cost of capital.The empirical results show that political connections can affect the cost of capital.Specifically: the political connection not only with the cost of equity capital is significantly negatively related to the establishment of a political association,can reduce the cost of equity capital of enterprises and government;political association and the cost of debt capital negatively related to the establishment of a political association can reduce the debt capital into the enterprise and the government.This shows that shareholders and creditors will pay attention to the information of the enterprise,especially when the enterprise and government to establish political association,shareholders and creditors of scientific analysis,analysis of investment risk will be reduced,which will reduce the required rate of return.