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

68 Pages Posted: 8 Oct 2015

See all articles by Robert Cull

Robert Cull

World Bank - Development Research Group (DECRG)

Wei Li

affiliation not provided to SSRN

Bo Sun

Board of Governors of the Federal Reserve System

Lixin Colin Xu

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

Multiple version iconThere are 2 versions of this paper

Date Written: 2015-01-21

Abstract

We examine the role of firms' government connections, defined by government intervention in CEO appointment and the status of state ownership, in determining the severity of financial constraints faced by Chinese firms. We demonstrate that government connections are associated with substantially less severe financial constraints (i.e., less reliance on internal cash flows to fund investment), and that the sensitivity of investment to internal cash flows is higher for firms that report greater obstacles to obtaining external funds. We also find that those large non-state firms with weak government connections, likely the engine for innovation in the coming years in China, 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. Our empirical results suggest that government connections play an important role in explaining Chinese firms' financing conditions, and provide further evidence on the nature of the misallocation of credit by China's dominant state-owned banks.

Keywords: Financial constraints, investment, political connections, firm size, China, capital allocation, invest cash flow sensitivity

JEL Classification: G18, G21, G28, G38, O16

Suggested Citation

Cull, Robert and Li, Wei and Sun, Bo and Xu, Lixin Colin and Xu, Lixin Colin, Government Connections and Financial Constraints: Evidence from a Large Representative Sample of Chinese Firms (2015-01-21). FRB International Finance Discussion Paper No. 1129, Available at SSRN: https://ssrn.com/abstract=2671037 or http://dx.doi.org/10.17016/IFDP.2015.1129

Robert Cull (Contact Author)

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

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

Wei Li

affiliation not provided to SSRN

Bo Sun

Board of Governors of the Federal Reserve System ( 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 NW
MSN3-311
Washington, DC 20433
United States

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

1818 H Street NW
MSN3-311
Washington, DC 20433
United States

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