The Economic Analysis On Private Entrepreneur's Political Anticipation

This article systematically analyzes the impact of entrepreneurs'political participation on external financing of company. Basing on the survey data from All-China Federation of Industry and Commerce, State Administration for Industry, which covers all 31 provinces and municipalities across the country in 2004, the paper firstly estimates the impact of political participation on capital structure. Initial analysis results show that entrepreneur involvement can significantly increase loan from the banks. This result is robust, and complements the current literatures about political connection.Furthermore, the paper explains this result with signal theory. Assuming imperfect information in credit market. the entrepreneur is aware of the quality and political endowment of enterprises while the banks know nothing about it. So the entrepreneur goes into politics to send the signal about his enterprise, and the equilibriums of the game emerge after the bank receives the signal of political participation and makes its decision of loan. In two kinds of separating equilibrium, the banks provide more loan to the enterprise whose operator participates politics. But when the signal transmits more information about the quality, the society will benefit more from this mechanism.This paper shows that in China, entrepreneur involvements of politics can influence the loan provided by the banks. One possible mechanism is that the political participation is a signal, sending the information about the quality and political endowment of the enterprise. So the government should be cautious about the entrepreneur's political participation.