Capital Structure And Political Patronage: Evidence From China

Abstract

This paper examines the effect of political patronage on capital structure of listed companies on the Shanghai Stock Exchange.  An empirical study is conducted using a common linear regression method, advanced panel data regression and two way-effect panel data regression to test whether conventional capital structure decision theory applies to the Chinese economic environment.  Large non-voting shares are used as proxy to represent political patronage.  We find a positive and significant link between leverage and political patronage.  We also find evidence of an indirect link between political patronage and capital structure through firm size and profitability.  The result proved the existence of political patronage on Chinese listed firms.  Chinese firms do not follow conventional trade-off theory, MM theory or pecking order.  Chinese institutional characteristic affects the capital choice decision and the largely state ownerships do affect capital structure choices.  We conclude that firms with strong political patronage prefer to raise equity first because they do not pay good dividends.  Equity, debt and internal funds are their choice of capital structure.