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Political Connections, Financing Friction, and Corporate Investment: Evidence from Chinese Listed Family Firms

Authors


  • We acknowledge the helpful comments from an anonymous referee, John Doukas (editor), Gary Tian, Zhen Wang, Mingui Yu, seminar participants at Wuhan University, and conference participants at the European Financial Management (Asian Finance) Symposium 2010 and the AsianFA 2010 Annual Conference. Financial supports from the National Natural Science Foundation of China (Nos. 70802002 and 71021001), the Social Science Research Project supported by the China Ministry of Education (No. 08JC630001), the Foundation for the Author of National Excellent Doctoral Dissertation of PR China (No. 201085), and the Fundamental Research Funds for the Central Universities and the Research Funds of Renmin University of China (No. 10XNK089) are also gratefully acknowledged. Professional editing service provided by Joelma Nascimento is greatly appreciated. All errors remain our responsibility.

Abstract

Using a sample of Chinese family firms from 2000 to 2007, we investigate the investment behaviour of family firms and the effects of these firms’ political connectedness on their investments in a relationship-based economy. Consistent with previous evidence that Chinese family firms have difficulty in financing, our results demonstrate that underinvestment due to problems with asymmetric information rather than overinvestment resulting from problems of free cash flow prevails in such firms. We further find that the political connectedness of family firms can help mitigate the underinvestment problem, with the mitigation effect being more pronounced in financially constrained firms.

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