Political Connection,Soft Budget Constraint And Over-Investment

In recent years, with the rapid development of private economy, there has been a boom in political participation of private entrepreneurs. It’s getting much more popular that private companies are developing their political connections. Political connections as an alternative market mechanism is conducive to protect property rights against government abuse and bring the enterprise financing facilities, tax incentives, market forces, and many other advantages. Thereby to a certain extent, it can make the enterprise development is not influenced by the institutional defects. However, from another point of view, political connections provide a convenient for government intervention so that companies assumed a more policy burdens, which tend to lead the enterprise SBC phenomenon. The debt leverage governance failures and inefficient investment behavior resulting from SBC, not only reduces the enterprise value, but also makes enterprises lack of innovative dynamic, which resulting in inefficient operation, and also in that case it is difficult to achieve optimal allocation of resources, there is likely to cause the inefficiency of bank loans and financial risks.Existing literature on the genesis of the SBC, strong explanatory power of state-owned enterprises, while business investment for SBC causes efficiency issues are mostly concentrated in the discussion of state-owned listed companies. Based on our special institutional transition period backgrounds and political relations between private enterprises to actively build a common phenomenon, try to raise the following questions:First, under the influence of political relations, whether there will still be a private enterprise SBC phenomenon; secondly, If so, under the influence of political relations between the SBC will lead to over-investment enterprises; Third, the impact of different levels of political relations between SBC and the degree of excessive expansion behavior is the same.This paper studied budget constraints and over-investment issues of private enterprises using observations of non-financial private enterprises listed in Shanghai and Shenzhen Stock Exchanges from2007-2011. The results show that:Soft budget constraints do exist in Chinese private enterprises; Political connections will strengthen the soft budget constraints of private enterprises and promote the over-investment, and as the level of political connections increases, the degree of soft budget constraint and the over-investment gets higher. Furthermore, in the poor external governance environment, debt governance is not only ineffective, but contributed to the non-efficiency investment behavior. However, in the good external governance environment, the debt can play a certain role in governance.