Political Connection Disruption, Financial Flexibility and Cash Policy

40 Pages Posted: 1 Feb 2016

See all articles by Xiaofeng Zhao

Xiaofeng Zhao

Lingnan University

Haohan Ren

School of Management, Fudan University

Date Written: January 30, 2016

Abstract

We use the disruption of political connection due to the investigation/arrest of top politicians in China as exogenous shocks to firms’ relation-based financing capacity to examine the relation between financial flexibility and cash policy. We find that political connection disrupted firms increase their cash holding relative to otherwise unaffected firms in the post-event period. The results are more pronounced in non-state enterprises, in firms with low tangible assets, and in firms with high investment opportunity. Furthermore, we find that political connection disrupted firms display a higher cash flow sensitivity of cash and enjoy higher marginal value of cash holding than do the unaffected firms. Overall, our results highlight the importance of political connection in the determinant of corporate decisions.

Keywords: Political connection (disruption), financial flexibility, cash policy

JEL Classification: G32, D73

Suggested Citation

Zhao, Xiaofeng and Ren, Haohan, Political Connection Disruption, Financial Flexibility and Cash Policy (January 30, 2016). Asian Finance Association (AsianFA) 2016 Conference, Available at SSRN: https://ssrn.com/abstract=2725258 or http://dx.doi.org/10.2139/ssrn.2725258

Xiaofeng Zhao

Lingnan University ( email )

Haohan Ren (Contact Author)

School of Management, Fudan University ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

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