Study On The Effect Of Political Connections On Investment Of Chinese Listed Companies

China is a country which is transferring from centrally-planned economy to the market-oriented economy. There is a lot of control to the market. During the process of this transition, as a universal social phenomenon, political connections are important parts to the firms'external environment. The successful use of political connections can let the company gain the potential benefits, which is directly related to the performance and competitive power of the firms. In this paper, I will introduce the political connections into the research of the firms'investment behaviors, in order to reveal the characteristics of investment behavior in this special market. The results show that:political connections have an important impact on the investment. Firms which have more financing constraints are more sensitive to the investment-cash flow. Political connections as an informal alternative mechanism can improve the financing status of company's and reduce the investment-cash flow sensitivity significantly. At the same time, political connections raise the level of investment-cash flow sensitivity of firms which are less financial constrained. Because the political connections can bring convenience to loan, such firms are more likely to over-invest. The financial development also has an important impact on the investment behavior of firms. The results will be different due to different levels of financial development. For firms which subject to financing constraints, the lower the level of financial development is, the more obvious improvement of financial constraints to the firms due to political connections. For firms which are less financial constrained, the lower the level of financial development is, the higher possibility of firm's over-investment by having political connections. This paper study on investment from the perspective of political connections, provide new ideas and evidence to the theory of under-investment and over-investment. It is also meaningful for the transformation of the government functions, development of the financial systems and improvement of the market.