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Effects of Financial Liberalization and Political Connection on Listed Chinese Firms’ Financing Constraints

Yan, Isabel K. and Chan, Kenneth S. and Dang, Vinh Q.T. (2011): Effects of Financial Liberalization and Political Connection on Listed Chinese Firms’ Financing Constraints. Forthcoming in: World Economy

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Abstract

This paper examines the impact of recent financial liberalization in China on the financing constraints of publicly-listed Chinese firms with and without politically-connected CEO/Chairman. Two continuous indices are used to measure the evolution and intensity of financial reforms: a financial liberalization index and a capital control index. The results indicate that while firms without politically-connected CEO/Chairman face significant financing constraints and politically-connected firms do not, financial liberalization has reduced the constraints for the former. Similarly, lower capital control in China’s equity market lessens credit constraints for non-connected firms. No statistically-significant impact is detected with regards to firms that have CEO/Chairman with powerful political background.

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