This study examines the effect of family control on the cash holding policy in China. We find that family firms with excess control rights tend to have high cash holdings that are tunneled rather than being invested or paid to shareholders. We further show that the incentive for controlling families to hold cash and for tunneling is exacerbated by the agency conflict between controlling and minority shareholders, i.e., it is weakened after the Chinese Nontradable share (NTS) reform and strengthened by the presence of multiple large shareholders who probably play no monitoring role in Chinese family firms. Furthermore, family firms' incentive to hold cash for tunneling is influenced by the unique characteristics of Chinese firms in the following ways: the incentive is stronger when the family founder has one child and face family succession problem, and when the founder has political connections and directly involves in firm's management; while it is weakened by family founder's social interpersonal trust with other entrepreneurs through their membership of Chambers of Commerce. Overall, we argue that family firms in China tend to hold high levels of cash for tunneling, which harms firm value, while the severe controlling-minority shareholder agency conflicts and unique Chinese family characteristics only make this situation worse.

This study examines the impact that political connections have on Mergers and Acquisitions (M&A) performance and the decisions of Chinese listed firms. We find that political connections destroy (create) value in SOEs (non-SOEs). Our findings show that connected SOEs are more likely to acquire local targets, especially when the local unemployment rate is high and when the firms are controlled by the local government, and they are less likely to conduct vertical mergers. M&A decisions of connected non-SOEs are less influenced by the government; instead, political connections in non-SOEs help bidders to integrate vertically and obtain external financing support.

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Using 29 recent high level anti-corruption cases in China as a natural experiment, we examine the patterns in merger and acquisition (M&A) decisions and performance in Chinese non-state owned enterprises (non-SOEs) before and after the exogenous severing of political connections. We identify a set of listed related non-SOEs whose managers bribed or had connections, through past working and educational experience, with corrupt bureaucrats from 2005 to 2011. We document that, after the arrest of corrupt bureaucrats, corruption related non-SOEs lose their competitive advantages in the M&A market. We observe a significant reduction in the likelihood of conducting M&As and the ability to access local and state-owned targets for these firms. They pay a higher takeover premium and consequently have worse post-M&A performance. Our results are robust when we exclude bribing firms, and firms whose related corrupt bureaucrats are arrested within a year before the announcement of the M&A.Furthermore, the influence of anti-corruption events varies across regions that have different levels of corruption index and industries with different levels of government support and competition. Overall, our study provides direct evidence to the question of why firms seek to establish connections with government officials through bribery or personal connections, and we reveal the benefits and costs of such connections.Commission for Discipline Inspection of the Communist Party of China records that 643,759 corruption cases were under investigation, 639,068 corruption cases were concluded, 668,429 people were punished by the administrative and Party disciplinary agencies and 24,584 people were transferred to the judicial organs for further investigations, from the end of 2007 to 2012.There were 81,391 commercial bribery cases that were under investigation, and more than 20 billion Chinese yuan were involved in these cases. This huge number of corruption cases not only provides opportunities to conduct our studies, but also reveals the importance and prevalence of having connections with government officials in China. Furthermore, the network (so-called 'Guanxi') is regarded as one of the most important and dominant factors in business operations in China, rather than formal contracts (Xin and Pearce, 1996). Under this institutional environment, the impacts of informal social connections such as political connections are enhanced.Secondly, the Chinese government still has a great capacity to intervene directly in firms' M&As at the various levels. For instance, while the Chinese economy has transformed from a government-controlled to a market-oriented economy, local governments still retain the right to allocate various resources through licensing, granting the right of land use and access to the capital market (Cull and Xu, 2003; Firth et al., 2009;Li et al., 2009 and.Moreover, M&A deals must obtain permission from local governments if they relate to a stateowned enterprise (SOE). Under these circumstances, Chinese firms will have a strong...

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