Political Capital, Political Environment and Bank Lending: An Investigation of Chinese Private Firms

Abstract

The existing literature on political capital and bank lending largely overlooks the role of the political environment. Using the theories of the political marketplace and political instability, we examine the effect of political capital on firms’ access to bank loans in relation to the political environment. In particular, we use political capital inequality and political instability to characterize the political environment. Using a nationwide survey of private firms in 2010, we find that private firms have more difficulty in gaining access to bank lending as the degree of political capital inequality increases. Furthermore, political capital exerts a positive effect on access to bank loans only when political capital inequality within a province exceeds about 0.488 and political instability is less than 0.7.

Keywords: Political Capital; Political Capital Inequality; Political Instability; Bank Lending; China