Political connections and corporate overinvestment: evidence from China

Abstract

Purpose

Using panel data for the period 2004-2010, this study shows that political connections have a significant positive effect on corporate overinvestment in China while their interaction with related-party transactions has a negative effect. Results also indicate that state-owned enterprises (SOEs) controlled by the Chinese central government tend to have greater overinvestment than non-SOEs. However, their interaction with related-party transactions has an opposite effect on overinvestment, lending support to the conjecture that firm ownership structure plays a significant role in corporate overinvestment decisions. The paper aims to discuss these issues.

Design/methodology/approach

Panel data analysis and regression.

Findings

This study shows that political connections have a significant positive effect on corporate overinvestment in China while their interaction with related-party transactions has a negative effect. Results also indicate that SOEs controlled by the Chinese central government tend to have greater overinvestment than non-SOEs.

Research limitations/implications

The research shows some Chinese firms' behavior that indicates expropriation of minority stockholders. Policymakers should be aware of this issue as overinvestment is not good for the economy as a while. The limitation of the study is based on six-year data.

Practical implications

Stockholders should monitor the firms to mitigate the overinvestment problems in Chinese firms.

Originality/value

This is the first paper to examine the overinvestment issue along with related-party transactions and political connections.

Citation

Su, Z.-q., Fung, H.-g. and Yau, J. (2013), "Political connections and corporate overinvestment: evidence from China", International Journal of Accounting & Information Management, Vol. 21 No. 4, pp. 285-296. https://doi.org/10.1108/IJAIM-02-2013-0006