Investment opportunity set, political connection and business policies of private enterprises in China

The main purpose of this paper is to examine the factors that determine the business policies of private enterprises in the People’s Republic of China. Little is known about these private enterprises although these are surpassing the state-owned enterprises to become the most important corporate sec...

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Bibliographic Details
Published in:Review of quantitative finance and accounting 2012-04, Vol.38 (3), p.367-389
Main Authors: Chow, Clement Kong Wing, Fung, Michael Ka Yiu, Lam, Kevin C. K., Sami, Heibatollah
Format: Article
Language:English
Subjects:
Accounting
Accounting/Auditing
Board of directors
Boards of directors
Business strategies
China
Corporate Finance
Dividends
Econometrics
Economic development
Economics and Finance
Executive compensation
Finance
Growth rate
Industrial policy
Investment
Investment opportunity set
Investment policy
Investments
Joint ventures
Operations Research/Decision Theory
Original Research
Personnel policies
Political affiliation
Politics
Private enterprise
Private enterprises
Public enterprise
Stock options
Studies
Success
Transition economies
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Summary:The main purpose of this paper is to examine the factors that determine the business policies of private enterprises in the People’s Republic of China. Little is known about these private enterprises although these are surpassing the state-owned enterprises to become the most important corporate sector in China. The phenomenal growths of these enterprises provide an interesting setting to study the effect of the investment opportunity set (IOS) on business policies. We also examine how a firm’s political connection, generally believed to be instrumental to a firm’s success in transition economies, affects its business policies. We provide evidence on the importance of these factors in shaping the private firms’ business policies in China. More specifically, our results show that growth firms pay lower dividends, have lower overdue receivables relative to sales, have higher percentage of bonus shares, and are more likely to engage in joint ventures. In addition, firms with better political connection are able to borrow more, are more likely to establish a board of directors, and are more likely to acquire SOEs. These results have policy implications with regard to private enterprises in transitional economies in general and those in China in particular.
ISSN:0924-865X
1573-7179
DOI:10.1007/s11156-011-0231-6