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

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.

• Item Type: MPRA Paper
• Language: English
• Keywords: Financial liberalization; investments; financing constraints; political connection; Chinese firms
• Subjects: G - Financial Economics > G3 - Corporate Finance and Governance > G31 - Capital Budgeting ; Fixed Investment and Inventory Studies ; Capacity; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy > E22 - Investment ; Capital ; Intangible Capital ; Capacity; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance

References

Arellano, M., Bond, S., 1991. Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations. Review of Economic Studies, 58, 277-297.

Bekaert, G. And Harvey, C. R., 2000. Foreign Speculators and Emerging Equity Markets. Journal of Finance, 50, 403-444.

Chan, K.S., Dang, V.Q.T, Yan, I.K.M., 2010. Financial Liberalization and Financing Constraints: Some Evidence from Panel Data of Chinese Firms. Manuscript.

Edison, H., and Warnock, M., 2003. A Simple Measure of the Intensity of Capital Controls. Journal of Empirical Finance, 10, 81-103.

Faccio, M., Masulis, R. W., McConnell, J. J., 2007. Political Connection and Corporate Bailouts. Journal of Finance, 61, 2597-2635.

Fan, J. P. H., Wong, T. J., Zhang, T.Y., 2007. Politically Connected CEOs, Corporate Governance, and Post-IPO Performance of China’s Newly Partially Privatized Firms. Journal of Financial Economics, 84, 330-357.

Forbes, K. J., 2007. One Cost of the Chilean Capital Controls: Increased Financial Constraints for Smaller Traded Firms. Journal of International Economics, 71, 294-323.

Gelos, G., Werner, A., 2002. Financial Liberalization, Credit Constraints, and Collateral: Investment in the Mexican Manufacturing Sector. Journal of Development Economics, 67, 1-27.

Gilchrist, S., Himmelberg, C., 1999. Investment: Fundamentals and Finance. NBER Macroeconomics Annual 1998, 13, 223-262

Harrison, A., Love, I., McMillan, M., 2004. Global Capital Flows and Financing Constraints. Journal of Development Economics, 75, 269-301.

Hermes, N., Lensink, R., 1998. Banking Reform and the Financing of Firm Investment: An Empirical Analysis of the Chilean Experience, 1983-92. Journal of Development Studies, 34, 27-43.

Jaramillo, F., Schiantarelli, F., Weiss, A., 1996. Capital Market Imperfections before and after Financial Liberalization: An Euler Equation Approach to Panel Data for Ecuadorian Firms. Journal of Development Economics, 51, 367-386.

Johnston, S., Mitton, T., 2003. Cronyism and Capital Controls: Evidence from Malaysia. Journal of Financial Economics, 67, 351-382.

Koo, J., Maeng, K., 2005. The Effect of Financial Liberalization on Firms’ Investment in Korea. Journal of Asian Economics, 16, 281-297.

Kose, M., Prasad, E., Rogoff, K., Wei, S-J., 2006. Financial Globalization: An Appraisal. NBER Working Paper #12484.

Laeven, L., 2003. Does Financial Liberalization Reduce Financial Constraints? Financial Management, 32, 5-35.

Love, I., 2003. Financial Development and Financing Constraints: International Evidence from the Structural Investment Model. Review of Financial Studies, 16, 765-791.

McKinnnon, R. I., 1973. Money and Capital in Economic Development. Washington, DC, Brooking Institution.

McKinnon, R. I., Pill, H., 1997. Credible Economic Liberalization and Overborrowing. American Economic Review, 87, 189-93.

Mitton, T., 2006. Stock Market Liberalization and Operating Performance at the Firm Level. Journal of Financial Economics, 81, 625-647.

Modigliani, F., Miller, M., 1958. The Cost of Capital, Corporation Finance, and the Theory of Investment. American Economic Review, 48, 261-297.

Obstfeld, M., 1994. Risk Taking, Global Diversification and Growth. American Economic Review, 84, 1310-1329.

Quinn, D., 1997. The Correlates of Changes in International Financial Regulation. American Political Science Review, 91, 531-551.

Schiantarelli, F., 1996. Financial Constraints and Investment: Methodological Issues and International Evidence. Oxford Review of Economic Policy, 12, 70-89.

Shaw, E. S., 1973. Financial Deepening in Economic Development. New York, NY, Oxford University Press.

Yi, W., Ding, D., 2007. The Design and Analysis of the Financial Liberalization Index of China. Shanghai Finance, July, 9-13 (in Chinese).