ABSTRACT
This study investigates the effect of social capital on financial constraints of Chinese cultural and creative enterprises (CCEs). We disaggregate a firm’s social capital into professional, political, and commercial capital. Our empirical results show that professional social capital can significantly reduce CCEs’ investment-cash flow sensitivity and help gain bank loans, thereby alleviating CCEs’ financial constraints. However, political and commercial social capital do not lessen financial constraints. We also find evidence that intellectual property protection acts to amplify the negative relation between professional social capital and financial constraints. These results are robust to alternative measures of key constructs and model specifications.
Disclosure statement
No potential conflict of interest was reported by the author(s).
Notes
1. In this paper, we treat the chairman of the board as the company’s leader, since in China, it is commonly found that a ‘sole majority shareholder’ exists in listed companies. Further, the chairman of the board, as the representative of the controlling shareholders, has substantial decision-making power (Li, Qin, and Zhang Citation2011). Given that chairman social capital embodies the social resources that the firm can access from the social network, we treat chairman social capital as firm social capital.
2. Outside of China, Goldman, Rochollm, and So (Citation2009) show that political social capital obtained by board members adds to the value of U.S. firms. Observing firms in 47 countries, Faccio (Citation2006) reports evidence of a positive relation between political connections and firm value.
3. Political connections can also be value destructive since government officials may engage in rent-seeking behavior (e.g. Krueger Citation1974; Ang and Jia Citation2014). Further, Boubakri, Cosset, and Saffar (Citation2008) report evidence that the managers of firms with strong political connections lack incentives to maximize shareholder wealth or improve operating profits.
4. In current empirical literature, investment-cash flow sensitivity (Fazzari et al. Citation1988; Chowdhury, Kumar, and Shome Citation2016; Javakhadze, Ferris, and French Citation2016; Larkin, Ng, and Zhu Citation2018), KZ index (Kaplan and Zingales Citation1997), cash-flow sensitivity (Almeida, Murillo, and Weisbach Citation2004), WW index (Whited and Wu Citation2006; Jing et al. Citation2019) and SA index (Hadlock & Pierce, Citation2010) are the mainly methods to measure firms’ financial constraints.
5. In current empirical literature, Tobin’s Q model and Euler equation investment model (Laeven Citation2003) are often used to identify the sensitivity of firms’ investment cash-flow sensitivity. We will employ these models as robustness tests in section 4.3 of this paper.
6. Some research (e.g. Wang, Lin, and Wu Citation2008; Chen and Chen Citation2012) contends that when firms face agency problems in the form of over-investment, firms’ investment may also be sensitive to cash flow. In spite of this concern, investment cash-flow sensitivity still remains one of the most widely-used method to measure firms’ financial constraints.
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Funding
This work was supported by the National Natural Science Foundation of China under Grant [72104218], Humanities and Social Science Research Projects of Zhejiang Education Department [The Humanities and Social Science Research Projects of Zhejiang Education Department Y202146606] and Humanities and Social Science Pre-research Foundation of Zhejiang University of Technology under Grant [The Humanities and Social Science Pre-research Foundation of Zhejiang University of Technology SKY-ZX-20210203].
https://orcid.org/0000-0003-4651-1773
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