Using a sample of Chinese family firms from 2000 to 2007, we investigate whether the political connection of the family firms will help them to reduce the frictions they face in external financing in a relationship-based economy. We find that political connectedness of family firms could reduce their investment-cash flow sensitivity. More interestingly, this political connectedness effect exists only in financially constrained family firms. However, from governance dimension, we cannot find any significant variation of the political connection effect on the sensitivity of investment to cash flow. We argue that these evidences are consistent with the firm’s underinvestment arising from the asymmetric information problems, and are inconsistent with the firm’s overinvestment arising from the free-cash-flow problems.
Nianhang Xu ;
Xinzhong Xu ;
Qingbo Yuan ;
Political Connection, Financing Frictions, and Corporate Investment: Evidence from Chinese Listed Family Firms （2011年01月18日）http://www.cfrn.com.cn//lw/gsjr/zbyshgzlw/3353.htm