How Do Political Connections and Government Anti-Corruption Crackdowns Affect Bank Lending in China?
TORONTO – Tuesday, August 17, 2021 – How do political connections influence firms’ credit benefits, especially when the central government is cracking down on corruption? A research team led by Professor Justin Tan of York University’s Schulich School of Business attempted to address this question by investigating bank loan contracts in China.
In this study, the research team distinguishes two types of political connections—connections to government officials and connections to council deputies—according to whether the political benefits they provide are exclusive and definite. Employing a panel data set comprised of Chinese listed firms’ bank-loan contracts from 2008 to 2014, they find politically connected firms—and particularly firms with connections to government officials—enjoy significantly lower loan costs than their non-connected counterparts. Moreover, they find that anti-corruption efforts, which reflect improvement in the political environment, reduce the credit benefits of political connections, but only for firms that have connections to government officials. Results emphasize the value of unpacking the heterogeneity of political connections and illuminate the importance of more complete assessment of corporate political strategies in changing political environments.
The research findings, reported in a paper recently published in Journal of Management Studies, examines how heterogeneous political connections work in the credit market, and how the effects of political connections respond to the improvement of the political environment. Results show first that political connections reduce firms’ bank loan costs, and this effect is more pronounced for firms that have connections to government officials. Additionally, by using anti-corruption efforts in China as proxies for political environment improvements, the research shows that the more intense the anti-corruption efforts, the weaker the effects of political connections on reducing firm’s’ bank loan costs. Furthermore, the research shows the effects of firms’ connections to government officials are more likely than the effects of firm’s connections to council deputies to be eroded by anti-corruption efforts.
The research offers valuable insights policy makers and multinational corporations doing business in China. With the changing business environment and rapidly rising competition, political connections may help firms win favorable treatment in credit markets. Research results confirm that political ties are valuable for companies, especially privately owned companies that receive limited legal and institutional protection and suffer discrimination in a state-dominated banking system such as China’s. It is crucial for business managers to deploy political strategy and build political connections, because political ties may deliver scarce resources and information that is vital for firms’ development and success. On the other hand, corporate political strategy increasingly has been criticized as being insensitive to business ethics issues. To some extent, political connections that exploit underperforming institutions have created opportunities for rent seeking and corruption. Managers, who are navigating in increasingly unstable political environments, must balance the political benefits of political ties with political risks or the vulnerability of political ties to adverse political shocks. Neglecting the dark side of political connections may lead to the failure of corporate political strategy.
The research paper, titled “Non-Market Strategies and Credit Benefits: Unpacking Heterogeneous Political Connections in Response to Government Anti-Corruption Initiatives?”, was co-authored with Fengyan Yu, Associate Professor of Finance at Tianjin University, Hongjuan Zhang, Associate Professor of Management at Tianjin University, and Qi Liang, Professor of Economics at Nankai University, all in China.
Professor Justin Tan is available for interviews about the findings. A copy of the study can be found here.