Loan financing and investment in princeling-backed firms

Qing Li, Qigui Liu, Shiguang Ma*, Gary Gang Tian

*Corresponding author for this work

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

This study investigates the role of princelings in Chinese listed firms. Our findings suggest that princelings ensure better access to bank loans for non-SOEs but bring no significant benefits to SOEs. Our empirical results further indicate that bank lending decisions are distorted for princeling-backed firms due to the privileges and protections they can obtain from the higher levels of the government through princelings' family ties. Moreover, we find that, due to excess long-term bank loans, princeling-backed non-SOEs tend to overinvest, which ultimately results in lower investment efficiency. Furthermore, we use the difference-in-difference method to capture the effect of the exogenous shock of the recent anti-corruption campaign in China on princelings and corporate finance and investment. We demonstrate that the anti-corruption campaign launched by the Chinese government in 2012 effectively weakened the power of princeling connections. Overall, our study suggests that by distorting bank lending decisions and encouraging overinvestment, the involvement of princelings in firms causes resource misallocation which favours princeling-backed firms and discourages investment in non-princeling-backed firms.

Original languageEnglish
Pages (from-to)71-92
Number of pages22
JournalPacific-Basin finance journal
Volume56
DOIs
Publication statusPublished - 1 Sep 2019

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Keywords

  • Bank loans
  • Investment
  • Political connections
  • Princeling-backed firms
  • Princelings

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