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Political connection, market frictions and financial constraints: evidence from China
Author(s) -
Deng Kebin,
Zeng Haijian,
Zhu Yushu
Publication year - 2019
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12301
Subject(s) - china , politics , economics , index (typography) , financial market , finance , empirical evidence , monetary economics , microeconomics , financial economics , world wide web , political science , computer science , law , philosophy , epistemology
This paper studies the relationship between market frictions and political connections in determining financial constraints. We develop a novel index to measure the depth of political connections ( PC ) at the firm level and provide robust empirical evidence that firms in China actively build PC to alleviate the costs of market frictions. Specifically, we find that firms facing severe market frictions are not as financially constrained as expected. This is because these firms also possess strong PC , which alleviate the costs of market frictions. We find that market frictions can significantly affect financial constraints in Chinese firms, but only for those firms with modest levels of PC .