Effect of political connections on corporate financial constraints: new evidence from privatization in China

ABSTRACT

Taking advantage of the SOEs privatization events in China, our research looks to identify the causal effect of political connections on corporate financial constraints. In a difference-in-differences framework, we demonstrate that after the transfer of control from state to private owners, privatized SOEs hoard more cash, save more cash from incremental cash flow, and exhibit higher cash flow sensitivity of investment.

KEYWORDS:

• Political connections
• financial constraints
• SOEs
• privatization

JEL CLASSIFICATION:

• E22
• G18
• G38
• O16

Acknowledgments

We would like to thank the anonymous referees for their helpful comments. We are also grateful to Qian Wan, Ben Diamond, James Taylor, Zichao Yang, Ying Zhu and Jian Xu for their suggestions. Sheng Fang and Xuesong Qian acknowledge the financial support from National Natural Science Foundation of China (71473091). Any errors are ours.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ http://www.enterprisesurveys.org/data/exploreeconomies/2012/china.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71473091].