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

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

This paper examines the role of firms' government connections, defined by government intervention in the appointments of Chief Executive Officers and the status of state ownership, in determining the severity of financial constraints faced by...

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Bibliographic Details
Main Authors:	Cull, Robert, Li, Wei, Sun, Bo, Xu, Lixin Colin
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2013
Subjects:	ACCESS TO BANK ACCESS TO BANK LOANS ACCESS TO CREDIT ACCESS TO EXTERNAL FINANCE ACCESS TO FINANCE ACCESS TO LOAN ACCESS TO LOANS ACCOUNTING AFFILIATED ORGANIZATIONS AGENCY PROBLEMS ANNUAL SALES ARREARS ASSET MANAGEMENT ASSET MANAGEMENT COMPANIES ASSET SALES BAILOUT BAILOUTS BALANCE SHEETS BANK CREDIT BANK FINANCING BANK LOAN BANK POLICY BANKING SECTOR BANKING SYSTEM BANKS BOND BOOK VALUE BORROWING BORROWING CAPACITY BRIBE BUSINESS CLIMATE BUSINESS ENVIRONMENT BUSINESS ENVIRONMENTS BUSINESS INVESTMENT CAPITAL ALLOCATION CAPITAL CONTROL CAPITAL INVESTMENT CAPITAL MARKET CAPITAL RATIOS CAPITAL STOCK CASH FLOW CASH FLOWS CHECKS COLLATERAL COMMERCIAL DISPUTES CONSTRAINTS ON ACCESS CORPORATE FINANCE CORPORATE GOVERNANCE CORPORATE INVESTMENT CORRUPTION COST OF DEBT COST OF EQUITY COST OF FUNDS CREDIT ALLOCATION CREDIT CONSTRAINTS CREDIT HISTORIES CREDIT MARKET CREDITWORTHINESS DEBT DEPENDENT DERIVATIVE DEVELOPING COUNTRIES DISCRIMINATION DIVIDEND DIVIDEND PAYMENTS DIVIDENDS DUMMY VARIABLE EARNINGS ECONOMIC ACTIVITY ECONOMIC DEVELOPMENT ECONOMIC GROWTH ECONOMIC PERFORMANCE ECONOMIC POLICY ECONOMIC SYSTEMS ENTERPRISE PERFORMANCE ENTREPRENEUR EQUALITY EQUIPMENT EQUITY CAPITAL EQUITY MARKET EQUITY MARKETS EXPENDITURE EXPENDITURES EXTERNAL CREDIT EXTERNAL FINANCING EXTERNAL FUNDS FINANCIAL CONSTRAINT FINANCIAL CONSTRAINTS FINANCIAL DIFFICULTY FINANCIAL FACTORS FINANCIAL INFRASTRUCTURE FINANCIAL INTERMEDIATION FINANCIAL MANAGEMENT FINANCIAL MARKET FINANCIAL NEEDS FINANCIAL RESOURCES FINANCIAL SERVICES FINANCIAL STRESS FINANCIAL STUDIES FINANCIAL STUDY FINANCIAL SUPPORT FINANCIAL SYSTEM FINANCING ARRANGEMENTS FINANCING CONSTRAINTS FINANCING NEEDS FIRM GROWTH FIRM PERFORMANCE FIXED ASSETS FOREIGN CAPITAL FOREIGN DIRECT INVESTMENT FOREIGN FIRMS FOREIGN LOAN FOREIGN OWNERSHIP FUND INVESTMENT FUTURE LOANS GOVERNMENT BAILOUT GOVERNMENT INTERVENTION GOVERNMENT INVOLVEMENT GOVERNMENT OWNERSHIP GOVERNMENT REGULATIONS GREATER ACCESS GROWTH OPPORTUNITIES GROWTH RATE GROWTH RATES HOLDING HUMAN CAPITAL INCOME INDICATORS OF ACCESS INFORMAL FINANCE INSTITUTIONAL REFORMS INSTRUMENT INTEREST PAYMENTS INTEREST RATE INTERNAL FINANCE INTERNAL FINANCING INTERNAL FUNDS INTERNATIONAL BANK INVENTORY INVESTING INVESTMENT BEHAVIOR INVESTMENT CASH FLOW SENSITIVITIES INVESTMENT DECISIONS INVESTMENT EFFICIENCY INVESTMENT FUNDING INVESTMENT NEEDS INVESTMENT OPPORTUNITIES INVESTMENT PATTERNS INVESTMENT RATES INVESTMENT SPENDING INVESTMENT-CASH FLOW SENSITIVITIES INVESTOR PROTECTION IPO KEY CHALLENGE LACK OF ACCESS LARGE FIRMS LEGAL CONSTRAINTS LEGAL SYSTEM LIQUIDITY LIQUIDITY CONSTRAINT LIQUIDITY CONSTRAINTS LIQUIDITY PROBLEMS LOAN ACCESS LOAN GUARANTEES LOCAL GOVERNMENT LOCAL GOVERNMENTS LOCAL INFRASTRUCTURE MARGINAL COST MARKET REGULATION MARKET VALUE MATCHING FUNDS MATURITIES NET VALUE OUTPUT OUTSTANDING BANK LOANS OWNERSHIP SHARES OWNERSHIP STRUCTURE POLITICAL ECONOMY POOR ACCESS POSITIVE COEFFICIENT PREFERENTIAL ACCESS PRIVATE SECTOR DEVELOPMENT PRIVATIZATION PRIVILEGED ACCESS PRODUCTIVE INVESTMENT PROFITABILITY PROPERTY RIGHTS PUBLIC POLICY REINVESTMENT RESTRUCTURING PROGRAM RETURN RETURNS SALES GROWTH SECURITIES SHAREHOLDER SHAREHOLDER PROTECTION SHAREHOLDING SMALL BUSINESSES SOURCES OF FINANCE START-UPS STATE BANKS STATEMENTS STOCK RETURNS TAX TAX BENEFITS TAX STRUCTURES TERMS OF LOAN TRADE CREDIT TRADE FINANCING TRADING TRANSPARENCY TURNOVER UNDERDEVELOPED CAPITAL MARKET WAGES
Online Access:	http://documents.worldbank.org/curated/en/2013/02/17386101/government-connections-financial-constraints-evidence-large-representative-sample-chinese-firms http://hdl.handle.net/10986/13145

Description
Summary:	This paper examines the role of firms' government connections, defined by government intervention in the appointments of Chief Executive Officers and the status of state ownership, in determining the severity of financial constraints faced by Chinese firms. In line with the previous literature, the paper demonstrates that investment by non-state firms is highly sensitive to internal cash flows, while no such sensitivity is found for government-owned enterprises. Even within the subset of non-state firms, government connections are associated with substantially less severe financial constraints (less reliance on internal cash flows to fund investment). The paper also finds that large non-state firms with weak government connections 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. Firms with government-appointed Chief Executive Officers also have significantly lower investment intensities, due perhaps to their lower-powered incentives. The empirical results suggest that government connections play an important role in explaining Chinese firms' investment behavior and financing conditions, and provide further evidence on the nature of the misallocation of credit by China's dominant state-owned banks.