Political Connection、Institutional Environment And Corporation Performance

The prevalence of political connections between government and enterprises, as well as its significant impact on business activities has made political connections a research hotspot in recent years. In China, political connections are particularly widespread with the influence of traditional culture and history. In the context of a transitioning economy, government intervention as well as its leading role in resources allocation greatly affects the market mechanisms, making the development of enterprises largely dependent on non-market mechanisms. Imperfect external institutions give this kind of connection more space.Many scholars have studied political connections, in the fields of corporate finance and investment, enterprise value, and the quality of accounting information disclosure and so on, mostly these are economic consequences. The motivation for enterprises to establish political connections is relatively less. Analysis is needed of how institutions affect political connections and the motivations for establishing political connections must be deepened in the research field of corporate performance and political connections. This article, from the institutional environment perspective, analysis both the motivations and economic consequences of political connections, test the mechanism of how political connections affect firms’ performance, further explore could political connection supplement formal institutions. And this would have significant importance both in reality and theoretical aspects.The first chapter is the introduction. This chapter includes the research background, value of research, and both theoretical and practical value, as well as a general scan of the research content and frame.Chapter two is the literature review from two aspects, both the consequences and institutional motivation of political connections, and to review existing literature. In the economic consequences of political connection part, further divided into three aspects to review, positive effect, negative effect and dual effect. In the Institutional incentives of political connections part, studies about the institutional environment start from legal and financial institutional aspects, expand to other institutional environment factors.Chapter three is the theoretical foundation. In this part, two theories describing the theoretical basis of this paper are introduced, namely rent-seeking theory and institutional economics theories. The rent-seeking theory mainly concludes its channel, manifestation and affection. Institutional Theory based on institutional economics, with introduction of formal and informal institutions. This chapter also shed light on informal institutional environment in China, the Guanxi culture and deficiencies of institutional arrangement as well as government intervention.Chapter four is empirical research design. According to the literature and theoretical analysis, this part includes research hypothesis, data sources, sample selection, variable explanation and research model. The empirical research design has two parts, first part is political connections’ impact on corporate performance, the second is from the perspective of institutions, deeply explain the impact of political connections. Regarding each part, the research hypothesis as follows:H1:political connections could increase corporate performance.H1-1:Government officials’political connections do not have an obviously oriented impact on corporate performance.Hl-2:NPC deputies and CPPCC members’political connections could enhance corporate performance.H2:In imperfect institutional environment, political connection, as an informal institutional arrangement plays a supplementary and alternative role for formal institutions, enhancing corporate performance.H2-1:The higher the degree of government intervention, political connections’positive impact on corporate performance is more effective.H2-2:In more developed private economy, the political connections’ positive effect on corporate performance is smaller.H2-3:In more backward level of financial development, the political connections’positive effect on corporate performance is greater.H2-4:In a worse legal environment, the political connections’ positive effect on corporate performance is more obvious. After empirical research design, data had been processed, including descriptive statistics and analysis, correlation analysis and multiple regression analysis. Chapter five analyzes the empirical test results. The main research results are the follows.In the first part regression, without institutional environment factor, political connection and performance are significantly positive; indicate that political connection could improve firms’ performance.In the second part regression, after introduction of the institution variables, political connection then demonstrates the negative effects, reducing corporate performance. Cross-term coefficient is significantly positive, reflecting the complementary relationship between political connection and institutional environment in affecting corporate performance. Institutional coefficient is also significantly positive; indicate that a sound institutional environment could improve firms’performance.The effect of government officials’political connection is not clear, while NPC deputies, CPPCC members’political connection is significantly positive to improve firms’performance.Financial performance is more obvious than market performance.Chapter six, the final part, provides conclusions and policy recommendations. The main conclusions are as follows.Political connections have dual effects. Political connections have both the positive and negative effects on corporate performance. Regarding of imperfect institutional environment and current circumstances, the role of improving is of more prominent influence, and could be able to compensate the costs of rent seeking.NPC deputies, CPPCC members’political connections are more obvious than government officials’ political connections.NPC deputies, CPPCC members’ political connections have a relatively simple constitutions, their effect on corporate performance in the same direction, thereby significantly improve performance; while government officials’political connections include a more complex sorts, and have both positive and negative effects on corporate performance, thus lead to an unclear result. Furthermore, NPC deputies, CPPCC members’political connections mostly are initiative while government officials’ have both initiative and passive. Therefore, initiative political connections are conducive to improve corporate performance, while passive connections are more reflecting government intervention then reduce corporate performance.Institutional environment factors are deep-seated reasons for establishing political connections. In the areas with a higher degree of government intervention, less developed private economy, as well as a lower level of financial sector development and imperfect legal environment, private enterprises are more likely to establish political connections, which could improve corporate performance. Facing the imperfect external institutional environment, private enterprises in order to protect their own interests and better deal with the uncertainty brought by external environment, establish political connections to be supplementary and alternative mechanisms for imperfect formal institutions and further to gain benefits.Political connections and institutional environment effect corporate performance. In the absence of institutions, through the establishment of political connections, the synergies of political connections and institutions could make up for unfavorable external environment, thereby enhancing corporate performance. However, when the institutional environment tends to improve, the synergies tend to decline until political connections reflect negative impact on corporate performance. At this time, too many political connections will reduce corporate performance.Innovations:This article combines motivation and consequences, from the perspective of the institutional environment to explore the economic consequences of political connections. This article also tests the mechanism of how political connections affect firms’ performance, both from the positive side and negative side. In addition, it distinguishes two types of political connection, NPC deputies, CPPCC members’ political connections and government officials’political connections. And proposed that initiative political connections are conducive to improve corporate performance, while passive connections are more reflecting government intervention then reduce corporate performance.Limitations: This article has the data from2007to2009. These three years’research has a relatively short span, and it is not the newest data. Also according to the difficulties in collection data, this article limits the research objects to the listing private enterprises. However, other private firms, which are not included, are at large. Besides, the definition of political connection is only the connection of CEO and chairman. Other types of political connection are not considered. The measurement of political connection is by dummy variables. There is need of a more precise measurement of political connection that could reflect its strength.