Bank Work Experience Versus Political Connections: Which Matters for Bank Loan Financing?

Abstract

This paper examines how bank lending decisions are affected either by executives' connections with banks, through their former banking experience, or by their political connections with governments, using a sample of bank loans granted to Chinese listed non-state-owned enterprises (SOEs) from 2003 to 2010. We find that bank loans are more closely related to profitability for firms with bank connections, while firms' political connections weaken this relationship. We further find that the influence of bank connections is more significant for firms from less supported industries or less developed regions. Furthermore, firms with bank connections are less likely to become financially distressed after the initiation of their bank loans and experience higher future stock returns, while firms with political connections experience the opposite outcome. Overall, our results indicate that in the context of a relationship-based economy like China, firms' connections with banks create value by alleviating information asymmetry and improving banks' lending decisions, while political connections result in capital misallocation and subsequent deterioration in performance.

Political Connections and Corporate Financial Decision Making

“…Our empirical findings are consistent with Pan and Tian (2018), Ebrahim et al, (2014), Faccio (2006, Khwaja and Mian (2005), Dinç (2005) is used, we obtain a stronger association between connections and leverage. In terms of economic significance, results indicate that connections with winning politician would lead to an increase in leverage by 8%.…”

“…Second, firms can benefit from direct governmental support in the form of receiving government contracts, reduced regulatory requirements, and tax rebates. In this regard, Pan and Tian (2018) (2006) revealed the role of political ties in granting import licenses at the expense of their competitors. Lastly, connected firms even enjoy preferential treatment from the judicial system in bankruptcy court proceedings.…”

Regional favoritism and tax avoidance: evidence from China

“…On the other hand, Dong et al . () and Pan and Tian () fail to find empirical evidence that firms with political connections obtain financial benefits. Our research suggests another avenue through which politicians can impact corporate welfare, namely, unequal taxation caused by political favoritism and find that politically favored firms receive lower tax burdens.…”

Political connections and corporate financial decision making

“…The effect of political connections on business is well recognized, but not well understood. It is generally argued that firms secure economic benefits and advantages from connections with politicians (Xu et al, 2018;Batta et al 2014;Faccio, 2010), particularly in less developed markets (Pan and Tian, 2018;Batta et al 2014;Chen et al, 2011;Claessens et al, 2008). For instance, Muttakin et al (2015) show that politically connected family firms outperform nonconnected family firms in Bangladesh.…”