Research On The Impact Of Political Connections On Enterprise' Innovation And M&A

New institutional economics hold the view that the macroeconomic and micro-foundation of a country or region are affected by its institutional environment(North,1990,North,1981,North and Thomas,1973),therefore,institutional environment will have impact on enterprises which are one of the microeconomic entities.As an alternative mechanism to the formal institutional environment,political connections will also affect the operation activities of enterprises,and many researchers have found enough evidence to support this point.Political connections can not only help enterprises get preferential treatment,but also affect their decision-making behavior.Therefore,political connections probably have huge impact on enterprises' innovation decisions and M&A decisions.The innovation decision and M&A decision of an enterprise will have a huge impact on the value of the enterprise,and the behavior of enterprises is a concrete manifestation of a country's economic state,so it is of great practical significance to study the impact of political connections on the enterprise's innovation activities and M&A behavior and the channel how political connections play a role in these two important decisions.Combining with the information asymmetry theory,the principal-agent theory,the financing constraint theory,the rent-seeking theory and related literatures,this article puts forward reasonable assumptions about the impact of political connections on enterprises' M&A and innovation activities,and then builds model to test those assumptions.The sample this paper uses is A shares in Shanghai and Shenzhen Market and the sample period is from 2012 to 2016.The empirical regression results show that:(1)The political connections will hinder enterprises' innovation activities,and reduce the probability that enterprises make a decision to innovate.However,this effect mostly comes from the state-owned enterprises.(2)The political connections will increase the probability of M&A,but the difference between state-owned enterprises and non-state-owned enterprises is not significant.(3)From the perspective of principal-agent theory,this paper finds that the negative effect of political connections on enterprise innovation in state-owned enterprises may come from the phenomenon of nonfeasance.Political connections will contributed to the phenomenon of nonfeasance in management,and reduce the probability of innovation activities.(4)Because political connections can help enterprises obtain various conveniences,including loans with lower interest rates and government subsidies,the positive effect of political connections on M&A is greater when enterprises face financing constraints or external environment constraints.The main contributions and innovations this paper has are mainly manifested in the following three points.First of all,this paper mainly explores the impact of political connections on enterprises' innovation behavior and M&A,therefore,this paper enrich the literature of political connections' impact on business decisions to some extent.Second,in the study of how political connections inhibit enterprises' innovation activities,this paper found that existing literatures would likely to express this negative effect from the crowding-out effects,competition mechanism and political risk.However,from the perspective of principal-agent theory this paper found a new way how political connections inhibit enterprises' innovation activities,that is enterprises' nonfeasance,which provides a new direction to weaken the negative impact of political connections on enterprises' innovation activities.Finally,when studying the influence of political connections on M&A,this paper tries to explain how political connections facilitate M&A from the perspective of financing constraints,which can provide a guide for enterprises to properly use political connections to promote enterprise' value.