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Research Notes
A number of studies have looked at the effects of political ties on the performance of companies since the seminal work of Sapienza (2003). Firms with political connections are observed to enjoy preferential treatment in obtaining bank loans (Sapienza 2003; Khwaja and Mian 2005; Claessens, Feijen, and Laeven 2008; Li et al. 2008; Firth et al. 2009; Boubakri, Cosset, and Saffar 2012), with respect to tax benefits (Adhikari, Derashid, and Zhang 2006; Faccio, Masulis, and McConnell 2006; Wu et al. 2012), and in gaining financial assistance from the government (Johnson and Mitton 2003; Faccio, Masulis, and McConnell 2006). This literature concludes that connected firms also have superior financial performance (Fan, Wong, and Zhang 2007; Boubakri, Cosset, and Saffar 2012; Faccio 2010; Wu, Wu, and Rui 2012).
With respect to China, it is known that state-owned enterprises (SOEs) enjoy an advantaged status in obtaining bank loans, subsidies, tax breaks, and many crucial inputs (Chow, Song, and Wong 2010; Poncet, Steingress, and Vandenbussche 2010; Wu et al. 2012). Firms with political connections do not face underinvestment problems (Xu, Xu, and Yuan 2013), receive favorable government treatment (Sheng, Zhou, and Li 2011; Khwaja and Mian 2005; Li et al. 2008), are more likely to receive government contracts and bailout funds (Faccio, Masulis, and McConnell 2006), have stronger cash positions, secure larger long-term loans and have lower financing costs (Su and Fung 2013), and are more likely to survive (Du and Girma 2010). Such firms also have more confidence in the legal system (Li et al. 2008).
The theoretical reason for these findings is simply stated. The incentive for corporations to establish political connections in transition economies ultimately arises from continuing state control of key resources. In a relationship-based economy such as China's, building connections with the government or even engaging in politics can facilitate private communications with officials, thereby mitigating severe information asymmetries and risks of discrimination (Li et al. 2008; Wu, Wu and Rui 2012; Xu, Xu, and Yuan 2013).
Previous studies have generally shown how political connections affect average corporate performance across large samples of firms, typically using OLS specifications. But these findings only summarize the average relationship between a set of regressors and...