Political Connections, Founding Family Ownership and Leverage Decision of Privately Owned Firms
38 Pages Posted: 25 Aug 2010 Last revised: 3 Mar 2011
Date Written: August 23, 2010
In this paper, we examine the effect of political connections versus founding family ownership on the relationship between disproportional ownership structure and leverage decisions of privately owned firms listed in Chinese market. We find that disproportional ownership has positive effect on leverage, indicating that controlling shareholder tends to use both disproportional ownership structure and debt to expropriate. We also find that the interacted term between disproportional ownership and political connections has a positive impact on leverage ratio, and disproportional ownership structure is negatively related with leverage ratio of founding-family controlled firms, which indicate a substitute effect between political connections and founding-family ownership for the impact of disproportional ownership on leverage ratio. Finally, we provide evidence that controlling shareholder of firms with disproportional ownership structure tends to use more related party loans for tunnelling. We argue that under China’s weak creditor protection institutions, political connections of chairman or CEO provide better access to financing for private-owned firms, but also provide excess external resources for controlling shareholder to expropriate. However, founding-family ownership can largely mitigate the tunnelling effect of controlling shareholder while privately controlled firms through taking-over from former State owned firms tends to facilitate the tunnelling effect of controlling shareholder through its political connections.
Keywords: disproportional ownership structure, political connections, leverage decision, founding-family ownership
JEL Classification: G32, G34
Suggested Citation: Suggested Citation