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Escaping political extraction: Political participation, institutions, and cash holdings in China

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  • Feng, Xunan
  • Johansson, Anders C.

Abstract

We study the effects of political participation on holdings of liquid assets in Chinese privately controlled listed firms. Previous research has shown that the risk of political extraction by politicians and bureaucrats in countries with weak institutions has an adverse effect on holdings of liquid assets. We propose that political participation by private entrepreneurs can function as a means to alleviate some of that risk. We find that political participation in China is positively related to cash holdings in regions with weaker institutions. Our results also show that investments in “hard” assets such as PPE and inventories, which are less susceptible to the grabbing hand, are higher in regions with weaker institutions, but that political participation mitigates this effect. Finally, cash holdings have an insignificantly positive effect on firm value on its own, while political participation is positively associated with firm value. The interaction between cash holdings and political participation is positively related to firm value, again suggesting that political participation facilitates the holding of liquid assets in China, which in turn results in better firm performance.

Suggested Citation

  • Feng, Xunan & Johansson, Anders C., 2014. "Escaping political extraction: Political participation, institutions, and cash holdings in China," China Economic Review, Elsevier, vol. 30(C), pages 98-112.
    • Handle: RePEc:eee:chieco:v:30:y:2014:i:c:p:98-112
    DOI: 10.1016/j.chieco.2014.05.002
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    2. Gu, Xiaolong & Xin, Yu & Xu, Liping, 2019. "Expected stock price crash risk and bank loan pricing: Evidence from China's listed firms," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    3. Yu, Xiaojun & Yao, Yao & Zheng, Huanhuan & Zhang, Lin, 2020. "The role of political connection on overinvestment of Chinese energy firms," Energy Economics, Elsevier, vol. 85(C).
    4. Zhang, Yi & Liu, Chun, 2021. "Religion and unproductive entrepreneurship: The role of risk aversion," European Journal of Political Economy, Elsevier, vol. 70(C).
    5. Yujun Lian & Mohamad Sepehri & Maggie Foley, 2011. "Corporate Cash Holdings and Financial Crisis: An Empirical Study of Chinese Companies," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 1(2), pages 112-124, December.
    6. Tang, Tingfeng & Li, Zhigang & Ni, Jinlan & Yuan, Jia, 2020. "Land costs, government intervention, and migration of firms: The case of China," China Economic Review, Elsevier, vol. 64(C).
    7. Feng, Xunan & Johansson, Anders C. & Zhang, Tianyu, 2015. "Mixing business with politics: Political participation by entrepreneurs in China," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 220-235.
    8. Feng, Xunan & Johansson, Anders C., 2018. "Firm Ownership, Political Participation, and Access to Finance through Public Bond Offerings in China," Stockholm School of Economics Asia Working Paper Series 2018-50, Stockholm School of Economics, Stockholm China Economic Research Institute.
    9. Jia Liu & Oleksandr Talavera & Shuxing Yin & Mao Zhang, 2022. "Hierarchical political power and the value of cash holdings," Discussion Papers 22-03, Department of Economics, University of Birmingham.
    10. Sabeeh Ullah & Yasir Kamal, 2017. "Board Characteristics, Political Connections, and Corporate Cash Holdings: The Role of Firm Size and Political Regime," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 9(1), pages 157-179, March.
    11. Anderson, Hamish D. & Chi, Jing & Wang, Qing (Sophie), 2017. "Political ties and VC exits: Evidence from China," China Economic Review, Elsevier, vol. 44(C), pages 48-66.
    12. Chang, Yuyuan & Pan, Xiaofei & Wang, Jianling & Zhou, Qing, 2021. "Depoliticization and corporate cash holdings: Evidence from the mandated resignation of directors in China," Journal of Corporate Finance, Elsevier, vol. 69(C).
    13. Yaoqin Li & Xixiong Xu & Weiyu Gan, 2018. "Political extraction and corporate cash holdings in China," Asian-Pacific Economic Literature, The Crawford School, The Australian National University, vol. 32(2), pages 76-94, November.
    14. Fatima Saleh Abd Almajeed Al-Hamshary & Akmalia M. Ariff & Khairul Anuar Kamarudin & Norakma Abd Majid, 2023. "Corporate Risk-Taking and Cash Holdings: The Moderating Effect of Investor Protection," Capital Markets Review, Malaysian Finance Association, vol. 31(1), pages 1-23.

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    More about this item

    Keywords

    Political participation; Private entrepreneurs; Cash holdings; Political extraction; China;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • P48 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Legal Institutions; Property Rights; Natural Resources; Energy; Environment; Regional Studies

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