Relationship-based debt financing of Chinese private sector firms: The role of social connections to banks versus political connections |
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| Institution: | 1. College of Business, Shanghai University of Finance and Economics, Shanghai, China;2. School of Economics and Management, Tongji University, Shanghai, China;3. School of Management, State University of New York at Buffalo, Buffalo, NY, USA;4. Shanghai''s Global Resource Allocation Capacity Research Institute, Shanghai University of Finance and Economics, Shanghai, China;1. Shenzhen Audencia Financial Technology Institute, Shenzhen University, 3688 Nanhai Avenue, Nanshan District, Shenzhen, China;2. Monash Business School, Monash University, Wellington Rd, Clayton, VIC 3800, Australia;3. School of Business and Creative Industries, University of Sunshine Coast, 90 Sippy Downs Dr, Sippy Downs, QLD 4556, Australia;4. Adelaide Business School, Adelaide University, Adelaide, SA 5005, Australia;1. Department of Economics and Finance, Woody L. Hunt College of Business, The University of Texas at El Paso, 500 W. University Ave., El Paso, TX 79968, United States of America;2. Department of Finance, College of Business, Florida State University, United States of America;1. RB 239A, Department of Finance, College of Business Administration, Florida International University, Miami, FL 33199, United States of America;2. Finance and accounting Area, Indian Institute of Management, Indore, India;1. School of Business and Management, Shanghai International Studies University, 1550 Wenxiang Road, Shanghai 201620, China;2. SKEMA Business School, 99 Ren’ai Road, Suzhou 215123, China;3. School of Business, Nanjing University, 16 Jinyin St., Nanjing 210000, China;4. Li Anmin Institute of Economic Research, Liaoning University, 66 Chongshan Middle Road, Shenyang 110036, China |
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| Abstract: | We study whether a firm's social connections to banks can augment its political connections to help it obtain loans. In China, Regulation No. 18 (announced in 2013) prohibits all high-level government officials from being independent directors of firms. As a result, many firms lost their political connections. We find that after firms lose their politically connected independent directors, firms having no social connections to banks experience, on average, a 12% decrease in the bank loan ratio relative to the median ratio; but those whose board chairs or CEOs are socially connected to local bank branch heads experience a 22% increase in the loan ratio relative to the median. However, this positive effect is short lived and thus not a new equilibrium. Overall, our findings support the hypothesis that a firm's social connections to banks can augment its political connections to help it get bank financing. |
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