Government Connections and Financial Constraints: Evidence from a Large Representative Sample of Chinese Firms

58 Pages Posted: 20 Apr 2016

See all articles by Robert Cull

Robert Cull

World Bank - Development Research Group (DECRG)

Wei Li

Cheung Kong Graduate School of Business

Bo Sun

Board of Governors of the Federal Reserve System - Division of International Finance

Lixin Colin Xu

World Bank - Development Research Group (DECRG)

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2013

Abstract

This paper examines the role of firms' government connections, defined by government intervention in the appointments of Chief Executive Officers and the status of state ownership, in determining the severity of financial constraints faced by Chinese firms. In line with the previous literature, the paper demonstrates that investment by non-state firms is highly sensitive to internal cash flows, while no such sensitivity is found for government-owned enterprises. Even within the subset of non-state firms, government connections are associated with substantially less severe financial constraints (less reliance on internal cash flows to fund investment). The paper also finds that large non-state firms with weak government connections are especially financially constrained, due perhaps to the formidable hold that their state rivals have on financial resources after the "grabbing-the-big-and-letting-go-the-small" privatization program in China. Firms with government-appointed Chief Executive Officers also have significantly lower investment intensities, due perhaps to their lower-powered incentives. The empirical results suggest that government connections play an important role in explaining Chinese firms' investment behavior and financing conditions, and provide further evidence on the nature of the misallocation of credit by China's dominant state-owned banks.

Keywords: Access to Finance, Debt Markets, Bankruptcy and Resolution of Financial Distress, Investment and Investment Climate, Emerging Markets

Suggested Citation

Cull, Robert and Li, Wei and Sun, Bo and Xu, Lixin Colin, Government Connections and Financial Constraints: Evidence from a Large Representative Sample of Chinese Firms (February 1, 2013). World Bank Policy Research Working Paper No. 6352, Available at SSRN: https://ssrn.com/abstract=2212560

Robert Cull

World Bank - Development Research Group (DECRG) ( email )

1818 H. Street, N.W.
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Washington, DC 20433
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HOME PAGE: http://econ.worldbank.org/staff/rcull

Wei Li

Cheung Kong Graduate School of Business ( email )

Oriental Plaza, Tower E3
One East Chang An Avenue
Beijing, 100738
China

Bo Sun

Board of Governors of the Federal Reserve System - Division of International Finance ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Lixin Colin Xu

World Bank - Development Research Group (DECRG) ( email )

1818 H Street, N.W.
MC 3-427
Washington, DC 20433
United States
202-473-4664 (Phone)
202-522-1155 (Fax)

HOME PAGE: http://econ.worldbank.org/staff/cxu

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