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.
Details
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Author
Cull,Robert J., Li, Wei, Sun, Bo, Xu, Lixin Colin
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Document Date
2013/02/01
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Document Type
Policy Research Working Paper
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Report Number
WPS6352
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Volume No
1
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Total Volume(s)
1
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Country
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Region
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Disclosure Date
2013/02/01
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Disclosure Status
Disclosed
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Doc Name
Government connections and financial constraints : evidence from a large representative sample of Chinese firms
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Keywords
Finance & Private Sector Development;net value of fixed assets;Cash flow;access to external finance;access to bank loan;investment cash flow sensitivity;financial constraint;access to finance;allocation of credit;access to loan;investment-cash flow sensitivity;indicators of access;usage of trade;types of firms;effect of liquidity;constraints on access;formal financial system;returns to capital;average interest rate;asset management companies;outstanding bank loan;capital market imperfection;asset management company;impact of credit;cost of fund;cost of debt;access to equity;years of schooling;local government official;quality of infrastructure;measure of corruption;foreign direct investment;amount of fund;underdeveloped capital market;external fund;internal fund;trade credit;capital stock;sales growth;
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Citation
Cull,Robert J. Li, Wei Sun, Bo Xu, Lixin Colin
Government connections and financial constraints : evidence from a large representative sample of Chinese firms (English). Policy Research working paper ; no. WPS 6352 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/528341468017475824/Government-connections-and-financial-constraints-evidence-from-a-large-representative-sample-of-Chinese-firms