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

By Robert J. Cull, Wei Li, Bo Sun, Lixin Colin Xu. 2013

538 citations recorded by the source corpus.

We examine the role of firms' government connections, defined by government intervention in CEO appointment and the status of state ownership, in determining the severity of financial constraints faced by Chinese firms. We demonstrate that government connections are associated with substantially less severe financial constraints (i.e., less reliance on internal cash flows to fund investment), and that the sensitivity of investment to internal cash flows is higher for firms that report greater obstacles to obtaining external funds. We also find that those large non-state firms with weak government connections, likely the engine for innovation in the coming years in China, 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. Our empirical results suggest that government connections play an important role in explaining Chinese firms' financing conditions, and provide further evidence on the nature of the misallocation of credit by China's dominant state-owned banks.

Subfields: Accounting, Sociology and Political Science, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/c4803bf94a3bb6aa73f9c734c9fe2e30e599ec3a

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Citations in the corpus

The effect of government quality on corporate cash holdings (2014, unknown): “Moreover, as noted by Cull et al. (2014), there has been very limited research on financial constraints in developing countries.”
Does Infrastructure Investment Lead to Economic Growth or Economic Fragility? Evidence from China (2016, unknown): “…state-owned enterprises (SOEs)—many of which have been involved in building infrastructure—are the dominant corporate borrowers and continue to receive preferential access to debt (Allen et al. , 2005; Chen et al. , 2011; Yueh, 2011; Bailey et al. , 2012; Cull et al. , 2015; Deng et al. , 2015).”
What Do State-Owned Development Banks Do? Evidence from BNDES, 2002–09 (2015, background): “By targeting those firms, development banks may also leave only high-risk firms to private lenders, therefore inhibiting the emergence of a private market for long-term lending (e.g. Antunes et al., 2012; Cull et al., 2013).”
Multiple large shareholders, excess leverage and tunneling: evidence from an emerging market (2017, unknown): “This explanation appears consistent with the conclusion drawn by Cull et al. (2015) and Poncet et al. (2010) who found that credit allocation in China is driven by government intervention through state-owned banks which give preferential treatment to state”
State Control and Corporate Governance in Transition Economies: 25 Years on from 1989 (2016, unknown): “Several studies examine the effect of political connections at the board level (Liang et al., 2015; Fan et al., 2007; Zheng et al., 2014; Cull et al., 2015).”
In the name of charity: Political connections and strategic corporate social responsibility in a transition economy (2015, background): “, 1998), which increases transaction costs in various forms including windfall taxes, restrictive financing, and barricaded market entries (Claessens and Laeven, 2003; Cull et al., 2014; Gwartney and Lawson, 2009).”
Capital misallocation in China: Financial frictions or policy distortions? (2018, background): “Firms with government-appointed or government-connected chief executive officers are found to face much less severe financial constraints (Fan et al., 2007; Cull et al., 2015).”