３７【特集・論文】

Rent Seeking and Political Connections of China s
Family−Controlled Listed Companies＊
Jing MA・Lihui TIAN

［キーワード］Political connections, rent seeking, public China s stock market［JEL 分類番号］G12, G23, G28

1. Introduction
Rent seeking is the economic gains obtained
from others to a resourceful firm without

investor protections in China. It demands afurther study to understand whether and how
political connections can bring governmental
benefits to the connected firms.

reciprocating any benefits back to society

In this paper, we examine the data of thethrough wealth creation. The largest resource

family‑controlled firms listed on the Shanghai

comes from the government in China. Can theor Shenzhen Stock Exchanges. We find thatfirms benefit through political connections inpolitical connections of family‑controlled firms

China?

significantly bring about better long term

Faccio (2006) find that political connection

performance after listing and that political

can increase the value of the firm. Khwaja andconnections are associated with easier access

Mian (2005) and Leuz and Oberholzer (2005)

to bank loans, longer term loans, higher tax

point out that firms with political connections

rebates, and more government subsidies in

can obtain preferential financing. Faccio (2006)

family‑controlled firms.

and Adhikari et al. (2006) show that a good

This paper makes the following contributions

relationship with government can bring tax

to the literature. First, we provide the concrete

relief to the firm. Faccio et al. (2006) find that

empirical evidences of rent seeking by thepolitical connections are associated withfamily‑controlled firms in China, if they aregovernment supports.

well politically connected. Second, our paper

However, Shleifer and Vishny (1998) andFaccio et al. (2006) argue that politicalconnection may damage firm value. Fan et al(2007) find that political connections destructcorporate values in China, evidenced by lower
three‑year post‑IPO stock returns and bypoorer growth of three‑year post‑IPO
earnings. Bai et al. (2006) and Chen et al. (2011)
argue that political connections serves for───────────＊ Correspondence Address: Professor Lihui Tian,
Institute of Finance and Development, Nankai
University, Tianjin 300071, China. Email: LTian@nankai.edu.cn; Phone: +86 22 23503316. This
paper is supported by Natural Science Foundationof China (NSFC) (No.71272179), Ministry of
Education Social Science Project (No. 12YJA790124) and the NCET Program (No. NCET‑12‑0288).

３８

中国経済研究第１２巻第１号

enriches the literature of political connections

environment, such as China. The rents may(e.g. Faccio, 2006 and Faccio et al., 2006). Third,

come from better lending conditions, since

our findings of government benefits develop

most banks are controlled by the government

Allen et al. (2005), Bai et al. (2006), Li et al.

in China (Tian and Estrin, 2007). Leuz and(2006), and Chen et al. (2011).

Oberholzer (2005) and Khwaja and Mian (2005)

The rest of this paper is organized asargue that politically connected firms arefollows. Section 2 reviews the literature andeasier to achieve bank loans. Li et al. (2008)

develops the research hypotheses. Section 3

show that the Communist‑Party membershipdefines the sample, variables, and empiricalof private entrepreneurs helps to obtain loans

models employed.

from the banks. Chan et al. (2012) argue that

Section 4 empiricallyrelationshipthere are no financing constraints in the

between political connections and rent seeking

politically‑connected firms with the supports

as well as stock returns. Section 5 concludes.

from the government. Given the problem of

examinesanddiscusses

the

2. Rent seeking and political connections
Political connections are a growing streamof literature in finance and economics. Faccio(2006) finds that share prices significantly riseup in a company if setting up politicalcredit rationing in an emerging market, it
implies that the Chinese connected firms canhave more loans from the state‑controlledbanks, especially the long‑term loans.
Hypothesis 1: Political connections canincrease the leverage ratios.

connections, but Faccio et al. (2006) and

The rents shall also include less tax

Boubakri et al. (2008) argue that politically

payments. Faccio (2006) finds that politicallyconnected firms financially perform worse

connected firms enjoy lower taxes than non‑than their non‑connected peers.

connected ones. Examining the public listed

In the study of political connections in China,

companies in Malaysia, Adhikari et al. (2006)

Fan et al. (2007) show that the accounting andsuggest that tax‑rate of politically‑connected

stock performance of firms run by politicallyfirms is lower. Wu et al. (2012) also find thatconnected
unconnected

CEOs

are

worse

counterparts

in

than

their

private

the

newly

managers enjoy tax benefits in China. We

privatized firms. However, Allen et al. (2005)
and Bai et al. (2006) argue that being connectedto the government can bring about investor

firms

with

politicallyconnected

therefore have the hypothesis 2.
Hypothesis 2: Political connections help toreduce tax burdens.

protections. Li et al. (2008) argue that the

The rents shall also include the government

memberships of communist party for thesubsidies. Faccio et al. (2006) suggest that thesenior executives take the positive influences

politically connected firms can get moreon the performance of private firms. Chen et al.

financial aides from the government than non‑(2011) suggest that political connections canconnected firms. The hypothesis 3 is as therise up the value of private firms.

following.

In this paper, we argue that political

Hypothesis 3: Political connections areconnections bring about rent seeking andpositively associated with the government

increase corporate value in the connectedsubsidies.

family‑controlled firms with its weaker legal

If the above is true, the connected firms canRent Seeking and Political Connections of China s Family‑Controlled Listed Companies

３９gain the benefits from the government. That is,taking the general managers into account,rent seeking raises up corporate values at thethere are 45.1% firms to be politically connected.

cost of the social welfare. We therefore have

If taking the non‑independent directors into

the hypothesis 4.

account, there are 60.2% firms having political

Hypothesis 4: Political connections bringconnections.

about higher long‑term stock returns.

3. Sample, variables, and models
3.1. Sample

3.2. Variables
In the family‑controlled firms in China, theboss takes to the role of the board president

We study the share price data and financial

instead of the general manager and the boss

data from January 2009 to December 2011 fortends to make the decision with its large sizes

the firms in China s stock market. That is, ourof shares. Actually, the board president tends

sample includes the firms listed onto Shanghai

to get involved in the day‑to‑day operations

or Shenzhen Stock Exchanges in the year ofand management of the firm, as the representa-

2008. Our sample only retains the firms whose

tive of the legal person. Therefore, it is in needultimate controlling owners are the individuals

to examine whether the political backgrounds

or families.１

of board chairmen take influence on corporate

Our database includes the financial data,

behaviors. The dummy variables of politicalmarket data, the data of ultimate controlling

connections are measured by whether theowners and the data of political connections ofboard president is politically connected. Besides

all board members. Annual financial data andit, our paper also examines the impact ofmonthly market microstructure data are taken

political connections with the data of thefrom CSMAR database and WIND database,general managers and the directors of board inrespectively. We manually collected the data of

the robustness tests.

ultimate controlling owners and the political

Following Khwaja and Mian (2005), Adhikari

connections of board members from the IPO

et al. (2006), Faccio et al. (2006), and Fan et al.

prospectus released in 2008.

(2008), we examine the data of loan sizes, loan

If these board chairmen served in thematurity, effective tax rates, and government

central government, local governments or

subsidies for three years after public listing.

military or they are former or current

We follow the simple measures to examine

members of NPC (National People s Congress)

As a proxy of real tax burden of the firm, theor of CPPCC (Chinese People s Politicalvariables of real effective tax rates capture tax

Consultative Conference), we take them aspreference, tax base preference, and tax mountbeing politically connected. As a result, ourpreference. Shevlin (1987) suggests several

final sample consists of 57 companies and there

methods to calculate the real effective tax rateare 21 firms with political connections. If

and we correspondingly work out the variables───────────
１ For the purpose of comparison with Fan et al.
(2007), these firms in the financial industry are
involved to perform empirical analyses. However,
the results of this paper hold when these firms
are taken out from our sample.

of TAX1, TAX2 and TAX3 and the definitionsof the variables are given in table 1. The
variables of government subsidies are adjusted
by firm income and total assets, respectively.
To reduce the industrial effect, we adjust the

４０

中国経済研究第１２巻第１号

Table 1. Definitions of variables
Variable name

Variable definition

POL

Political dummy equals 1 if the president has working experiences serving
government or military, or is a former or current member of NPC or CPPCC,
and 0 otherwise.

Leverage

Financial leverage ratio. The current Year debt‑to‑asset ratio of a firm.

Stateshare

The percentage of state shareholding.

LnassetNatural log of total assets.

Market̲Book

Market‑to‑equity ratio measured as market value over book value in IPO
Year end.

Regulated

Regulatory industry dummy. Regulated equals 1 if the firm is in heavily sector(natural resources, public utilities, or finance and real estate), and 0 otherwise.

Total̲Loan

Total̲Loan is measured as the long term bank loan plus short term loan
divided by total assets.

Loan̲Term

Loan̲Term is calculated by long term bank loan over total assets.

TAXi

Real effective tax‑rate, i=1, 2, 3. TAX1 is calculated as income tax expense lessdeferred income tax expense, and divided by EBIT. TAX2 is defined as income
tax expense divided by adjusted pre‑tax accounting income. TAX3 ismeasured as income tax expense minus deferred income tax expense, anddivided by adjusted pre‑tax accounting income. We calculate adjusted pre‑tax
accounting income as pre‑tax income minus the difference between deferredincome tax expense and applicable tax‑rate.

Subsidyi

Government subsidy, i=1, 2, 3, 4. Subsidy1 and Subsidy3 are calculated bygovernment subsidy divided by total income and total asset, respectively.
Subsidy2 and subsidy4 are calculated by government subsidy minus added‑
value tax divided by total income and total asset, respectively.

BHARi

The i months buy‑and‑hold abnormal stock return from 2nd month after IPO,
adjusted by equally weighted return of Shanghai and Shenzhen stock
Exchange, i=12, 24, 36.

abovemeasures

with

the

corresponding

industry median value.
Following Fan et al. (2007) and Chen et al.
(2011), we measure share performance withthe abnormal market‑adjusted buy‑and‑holdvariables.
The choice of control variables follows Fan
et al. (2007) to use the following variables,
including(financial leverage),-(the percentage of state share),returns (BHAR) of 12‑month, 24‑month and(the natural log of total assets),

36‑month after being listed into the stock(the market‑to‑book ratio) andmarkets. The CAR and BHAR are adjusted by(industry dummy variable).

the equally weighted indices of Shanghai and
Shenzhen Stock Exchanges in all our analysis.

3.3. Models

If the adjustment changes to the value

The relationship between the rents andweighted indices, all our results remain almost

political connections are examined by thethe same. Table 2 presents the definitions offollowing model:

Rent Seeking and Political Connections of China s Family‑Controlled Listed Companies

（1）
The

are approximated by the variablesof leverages, tax rates and subsidies.

Table 2. Lending facilities and politicalconnections

is theabbreviation of political connections. The

Total̲Loan
POL

control variables are shown in the following
tables.

Leverage

We further examine the relationship between
stock returns and political connections with

Statesharethe following model:
LnassetMarket̲Book
(2)
where

(i=12, 24, 36) represents the 12,

Regulated

24, and 36‑month buy and hold abnormal
equally weighted adjusted

returns2,

respecti-

Intercept

vely.

4. Regression results
In this section, we empirically examine anddiscuss the relationship between the rents andpolitical connections. We find that politicalconnections can bring about lending facilitates,
reduce tax burdens, result in government
subsidies and therefore increase the stock
returns after public listing.
We use model (1) to test the relationshipbetween political connection and bank loan,
effective tax‑rate, and government subsidy infamily‑controlled firms. The regression results
are reported in the following tables, where the

４１adj. R2＊

0.014

Loan̲Term
0.007＊＊(1.67)(1.75)‑0.014＊＊＊‑0.003＊＊(‑6.88)(‑2.41)

＊＊＊

0.205

0.042＊＊＊(6.09)(2.91)‑0.0000.000(-0.02)(0.02)‑0.006＊＊＊‑0.001(‑3.43)(‑1.19)0.014

0.135＊＊＊(0.70)(5.10)

＊

0.260

0.009

(1.77)(0.13)

0.249

0.377

Note: The dependent variables in this table are thetotal bank loan
, the loan term
, real effective tax‑rate, andgovernment
subsidy.
The
independent variables are a dummy variableequal to 1 if the president is politically connected(zero otherwise), financial Leverage ratio,
the percentage ownership of government, the natural log of total assets,
the Market to book equity ratio, and adummy variableequal to one if the firm
is in a heavily regulated sector (natural resources,
public utilities, or finance and real estate). The
robust ordinary least square method is used in thistable. Robust t‑statistics are provided inparentheses. ＊＊＊, ＊＊, ＊ denote significant at the 1%,5%, and 10% levels, respectively.

robust OLS estimation methods are used.
Table 2 report the regression results oftive to help private listed firms obtain morepolitical connection on bank loans. Column 1bank loans. Column 2 shows that politicaldisplays that political connections have aconnection is positively relative to loan maturity

positive impact on total loans at 10% level,

which is consistent with Fan et al. (2008).

which indicates political connection is conduc───────────
２ The conclusion of this paper holds when
CARs are scaled by value weighted market
return of Shanghai and Shenzhen stock
exchanges.

Columns 1 and 2 suggest that politicalconnections can alleviate financing constraintsof family‑controlled firms. It supports Khwaja
and Mian (2005) that political connections canbring not only more loans but also longer

４２

中国経済研究第１２巻第１号

Table 3. Tax rebates and political connections
TAX1

TAX2

−0.036(−2.40)−0.033(−1.77)−0.027＊＊(−1.99)Leverage‑0.003‑0.003‑0.004(‑0.36)(0.62)(‑1.31)

LnassetMarket̲Book
Regulated
Intercept
adj. R2

＊

TAX3

POL

Stateshare＊＊‑0.076‑0.045‑0.057(‑1.39)(‑0.66)(‑1.23)0.009‑0.003‑0.021＊(0.54)(‑0.12)(‑1.68)‑0.001‑0.000‑0.004(‑0.76)(‑0.01)(‑1.08)

0.152

0.046

‑0.232＊＊(1.54)(0.41)(‑2.34)

0.139

0.314

0.776＊＊(0.43)(0.85)(2.54)

0.418

0.178

0.212

Note: The dependent variables in this table are the real effective tax‑rate. The independent
variables are a dummy variableequal to 1 if the president is politically connected (zero otherwise),financial Leverage ratio, the percentage ownership of government, the natural log of
total assets, the Market to book equity ratio, and a dummy variableequal toone if the firm is in a heavily regulated sector (natural resources, public utilities, or finance and real estate).
The robust ordinary least square method is used in this table. Robust t‑statistics are provided inparentheses. ＊＊＊, ＊＊, ＊ denote significant at the 1%, 5%, and 10% levels, respectively. Robust t‑statistics areprovided in parentheses. ＊＊＊, ＊＊, ＊ denote significant at the 1%, 5%, and 10% levels, respectively.

maturities of these loans. To some extent,

burdens.

family‑controlled companies gain better access

Table 4 report the regression results ofto the government‑controlled banks in China.

political connection on government subsidies.

Political ties between the government and the

As can be seen, political connections have afamily‑controlled firms may help the firm tosignificant and positive effect on government

obtain bank loans and ease the financing

subsidies. Indeed, our results are rather

constraints.

consistent with Johnson and Mitton (2003) andTable 3 reports the regression results ofFaccio et al. (2006) and political connections

political connection on real effective tax‑rate.

can help the private firms obtain more

It can be seen that political connection has agovernment subsidies.

significantly negative impact on tax‑rate,

Overall, political connections help to getwhich implies that political connection reduces

more bank loans, longer loan maturity, lower

the real effective tax‑rate of private firms.

effective tax‑rate, and more government

This result is consistent with Faccio (2006),

subsidies in the family‑controlled firms. If so,

Adhikari et al. (2006), and Wu et al. (2012).

can political connections increase corporate

Political connections help to reduce the tax

values?

Rent Seeking and Political Connections of China s Family‑Controlled Listed Companies

４３

Table 4. Government subsidies and political connections
Subsidy1

Subsidy2

Subsidy3

Subsidy4

＊＊＊

＊＊＊

＊＊

0.059＊＊

POL

0.147

(3.24)(2.63)(2.42)(2.40)

Leverage‑0.007‑0.004‑0.007＊‑0.005(‑0.91)(‑0.68)(‑1.87)(‑1.32)

Stateshare
LnassetMarket̲Book
Regulated
Intercept
adj. R2

0.091

0.076

0.123

‑0.0860.035‑0.107(0.55)(‑0.51)(0.25)(‑0.89)‑0.044‑0.033‑0.030‑0.023(‑1.08)(‑1.04)(‑1.19)(‑0.95)0.022＊＊

0.020＊＊＊

0.018

0.016＊＊(2.08)(2.74)(0.91)(2.47)

0.053

0.258

‑0.0560.214(0.19)(0.89)(‑0.26)(1.05)

0.778

0.256

0.767

0.176

(0.87)(0.39)(1.28)(0.35)

0.187

0.228

0.163

0.227

Note: The dependent variables in this table are the government subsidies. The
independent variables are a dummy variableequal to 1 if the president is politically connected (zerootherwise), financial Leverage ratio, the percentage ownership of government, thenatural log of total assets, the Market to book equity ratio, and a dummy variableequal to one if the firm is in a heavily regulated sector (natural resources, public utilities, or
finance and real estate). The robust ordinary least square method is used in this table. Robust t‑statistics
are provided in parentheses. ＊＊＊, ＊＊, ＊ denote significant at the 1%, 5%, and 10% levels, respectively. Robust
t-statistics are provided in parentheses. ＊＊＊, ＊＊, ＊ denote significant at the 1%, 5%, and 10% levels,
respectively.

Table 5 reports the 12‑month, 24‑month and0.482, which suggests that positive effects of

36‑month BHARs of listed firms after IPO.

political connection become larger with longer

The results display that political connection

periods on the stock market and consequently

has significantly positive effects on BHAR24

getting more established. Hypothesis 4 is welland BHAR36. It shows that political connections

supported. Consistent with the literature (e.g.,

can significantly enhance the value of the firm.

Fisman, 2001; Faccio, 2006; Chen et al, 2011),

With a different dataset, Fan et al. (2007),

political connections can improve corporate

however, find that the coefficients of the CEO svalue.

political connection are significantly negative.
The dataset of Fan et al. (2007) are mainly

5. Conclusion

newly partially privatized firms listed onto the

Examining the firms listed onto Shanghai orstock exchanges. However, we found that

Shenzhen Stock Exchanges, this paper investi-

political connections have significantly positive

gates the relationship between rent taking andeffects on corporate value in the family‑

political connections. We find that politicalcontrolled firms. The coefficients of politicalconnections in the family controlled firms areconnection gradually increase from 0.109 to

associated with the governmental benefits,

４４

中国経済研究第１２巻第１号

Table 5. Stock returns and political connections
BHAR12

BHAR24

BHAR36＊＊＊＊＊

0.482＊＊

POL

0.109

(2.13)(2.97)(2.22)

Leverage

0.024＊＊

0.028＊

0.066＊＊(2.19)
Stateshare
LnassetMarket̲Book
Regulated
Intercept
adj. R2

0.379(1.79)(2.21)＊‑0.919‑0.466‑1.269＊(‑1.98)(‑1.17)(‑1.91)

0.017

0.028

0.072

(0.19)(0.27)(0.38)‑0.028‑0.0060.032(‑1.38)(‑0.2)(0.77)

0.172

0.172

0.612

(1.21)(1.19)(1.47)‑0.585‑0.839‑2.712(‑0.37)(‑0.48)(‑0.57)

0.030

0.034

0.029

Note: The dependent variables reported in this table are the 12‑, 24‑, 36‑month buy‑and‑hold returns(BHARs) adjusted by equally‑weighted market return from the second month after the IPO month.
Monthly returns are used to calculate the BHARs measures. The independent variables are a dummy
variable POL equal to 1 if the president is politically connected (zero otherwise), financial Leverage ratio
Leverage, the percentage ownership of government Stateshare, the natural log of total assets Lnasset, theMarket to book equity ratio Market̲Book, and a dummy variable Regulated equal to one if the firm is in aheavily regulated sector (natural resources, public utilities, or finance and real estate). The regressions
adopt ordinary least square methods. Robust t‑statistics are provided in parentheses. ＊＊＊, ＊＊, ＊ denotesignificant at the 1%, 5%, and 10% levels, respectively.

including the better access to bank loans,controlled firms, when these firms canlower tax effect rates and higher government

successfully build up political connections.

subsidies. The rents taken from the govern-

Our results also mean that, the higher value

ment can bring up the corporate value at theof family firms may come from rent taking

cost of the social welfare.

instead of corporate efficiency under the poor

In a transition economy, like China, where

institutions of legal enforcement in China. The

the legal enforcement is weak and thestock market in China may not be able to help

government intervention is heavy, politicalmuch on the efficient resource allocation, as

connections have different influences on thepolitical connections twist the market functions.

value of government‑controlled and family‑

The relationship between the government andcontrolled firms. With the recent dataset and a

the firms remains a key problem in China evenmore comprehensive approach, our paper

after its partial privatization or with its new

develops Fan et al. (2007). We find that thefamily‑owned business, since there is still avalue enhancement of thelong way to go for China to improve its legal

helping hand of

the government is larger than the value
reduction of the

grabbing hand in family‑

environments.

Rent Seeking and Political Connections of China s Family‑Controlled Listed Companies

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Jing MA(Nankai University)
Lihui TIAN(Nankai University)

４６

中国経済研究第１２巻第１号

Rent Seeking and Political Connections of China s
Family−Controlled Listed Companies
Jing Ma（Nankai University）
Lihui Tian（Nankai University）
Keywords: Political connections, rent seeking, public China s stock market
JEL Classification Numbers: G12, G23, G28
Can political connections bring about government benefits? Investigating the firms publicly
listed on the Chinese stock, we find that political connections in family‑controlled firms areassociated with better accesses to bank loans, less tax payments and more government subsidies.
We further find that political connections can result in higher stock returns in the Chinese family‑
controlled firms. We argue that political connections bring about rents for the family‑controlledfirms under poor institutional environment, which increases corporate value at the cost of social
welfares.