Political Connection, Allocation Of Bank Credit Resource And Escalating Commitment

As a market substitute mechanism, political connection plays a pivotal role in theprocess of resource allocation. On the one hand, political connection brings many benefitsfor enterprises, such as the lower transaction costs, the cheap resources, tax preference andthe access right in regulated market and industry. Moreover, political connection transfersquality signal to the market and reduces the degree of information asymmetry so thatenterprises obtain more financing opportunities. On the other hand, enterprises maydevelop "relationship" with government officials, to the detriment of the corporate value. Atthe same time, the government may impose unnecessary regulation in order to interveneand even plunder corporation, which is not conducive to the long-term development ofenterprises, and it may even have a negative impact on the macro-resource distribution.Escalating commitment is a decision behavior that decision-maker perseveres inadditional investment when the project has been invested lots of resources and its prospectis not optimistic. Now most studies about escalating commitment are carried out from theperspective of decision-maker’s judgment bias and irrationality, and they implicitly assumethat managers can get enough funds for the project. However, capital supply is limitedrelative to capital demand. Therefore, research on escalating commitment only from theperspective of decision-maker’s investment willingness is one-sided.However, theorists have not given clear conclusion about the political connection howto influence the resource allocation, the efficiency of resource allocation and resourceallocation mechanism. This paper researches on the mechanism and conduction route ofpolitical connection, credit financing and escalating commitment based on the ability of theinvestment by applying structural equation model. So we can explore the effects ofgovernment’s "the helping hand" and "the grabbing hand" on micro-enterprise. The paperconducts an empirical research based on data of Chinese listed companies from2005to2009in order to predict the development direction of government-enterprise relationshipand bank-enterprise relationship, and provides a theoretical basis for further researches onthe economic consequences of political connection.This article can be divided into seven chapters, each chapter can be described asfollows:The chapter one: Introduction. This chapter firstly describes the relative backgroundand points out the significance of the study. Secondly, introducing the contents and theresearch methods used by this article. Finally, concluding the contribution of this study.The chapter two: Literature review. Firstly, defining the concept of escalating commitment and stating the relevant interpretation theory. Secondly, defining the conceptof political connection and reviewing research on the relationship between politicalconnection and investment efficiency. Finally, commenting on the existing literature andfinding out the basic stand of this paper.The chapter three: Theoretical analysis. This chapter analyses the mechanism ofpolitical connection and escalating commitment based on the relevant theories aboutgovernment’s "the helping hand" and "the grabbing hand". And then building a logicalframework between political connection, credit financing and escalating commitment.The chapter four: Study design. Firstly, explaining the measure methods of politicalconnection, credit financing and escalating commitment. Secondly, selecting the studysample and establishing the empirical model.The chapter five: An empirical test of the relationship between political connection,credit financing and escalating commitment. This paper conducts empirical tests about thedirect effect of political connection and credit financing, the mediator effect of creditfinancing and the moderator effect of political connection by making descriptive statisticanalysis, correlation analysis and multiple regression analysis based on the sample data.The chapter six: Robust test. This chapter provides a robust test on researchconclusions by replacing substitute variables and adjusting test method, and the results areconsistent with earlier conclusions.The chapter seven: Conclusions and future research directions. Firstly, summarizingthe main conclusions of the study, and putting forward relevant policy suggestions.Secondly, proposing the limitation of this study and future research directions.Results show that political connection and credit financing have direct effects onescalating commitment, that is, closer political connection lead to escalating commitmentmore easily, and the availability of credit financing will increase the probabilities anddegree of escalating commitment. Credit financing have the mediator effect on politicalconnection and escalating commitment: political connection affect escalating commitmentthrough credit financing. Political connection have the moderator effect on credit financingand escalating commitment, namely credit financing of the enterprises with closer politicalconnection lead to escalating commitment more easily.The contributions of this paper are: Firstly, the paper studies the mechanism ofpolitical connection based on the ability of the investment during the period of theeconomic transformation in China. Secondly, explaining the relationship between politicalconnection, credit financing and escalating commitment, and building a logical framework.Finally, expanding the research contents in the field of escalating commitment from therational perspective. The results enrich the research on escalating commitment, relationship between government and enterprises, as well as relationship between banks and enterprises.It provides a theoretical basis to complete the credit financing mechanism and standardizethe investment and financing behavior of listed companies.