Political Connection, Market Frictions and Financial Constraints: Evidence from China

38 Pages Posted: 19 Mar 2020

See all articles by Kebin Deng

Kebin Deng

Guangdong University of Foreign Studies

Haijian Zeng

Guangxi University

Yushu Zhu

University of Queensland - Business School

Date Written: December 2019

Abstract

This paper studies the relationship between market frictions and political connections in determining financial constraints. We develop a novel index to measure the depth of political connections (PC) at the firm level and provide robust empirical evidence that firms in China actively build PC to alleviate the costs of market frictions. Specifically, we find that firms facing severe market frictions are not as financially constrained as expected. This is because these firms also possess strong PC, which alleviate the costs of market frictions. We find that market frictions can significantly affect financial constraints in Chinese firms, but only for those firms with modest levels of PC.

Keywords: Financial constraint, Political connection index, Asymmetric information, Liquidity, Chinese stock market

Suggested Citation

Deng, Kebin and Zeng, Haijian and Zhu, Yushu, Political Connection, Market Frictions and Financial Constraints: Evidence from China (December 2019). Accounting & Finance, Vol. 59, Issue 4, pp. 2377-2414, 2019, Available at SSRN: https://ssrn.com/abstract=3556061 or http://dx.doi.org/10.1111/acfi.12301

Kebin Deng (Contact Author)

Guangdong University of Foreign Studies

Collaborative Innovation Center for Silk Road
Guangzhou, Guangdong
China

Haijian Zeng

Guangxi University

East Daxue Road #100
Nanning, Guangxi 530004
China

Yushu Zhu

University of Queensland - Business School ( email )

Blair Drive
Brisbane
Australia

HOME PAGE: http://https://www.business.uq.edu.au/staff/yushu-elizabeth-zhu

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