The impact of political connection on listed firms' financial performances in China

Abstract

This study analyzes the relationship between political connection and financial performances of listed companies in China. We use data of Chinese Center Committee members, corporate executives, board members and listed firms’ financial data from years 2005 to 2014. It is found that the stronger the external or internal political connections, the higher ROA and market capitalization value. For the reason that geographical political backings induces corporate relations and funding which helps firms expand and increase revenue. Compared with private firms, state-owned enterprises have automatic access to political backings and are more likely to receive support for financing which allows them to have higher leverage. Moreover, both external and internal political connections have impact on listed firms in short run while this effect disappears in the long run. However, excessive political power causes active political influence to become excessively intervened by the government, affecting the expansion of enterprises and reducing the efficiency of enterprises.