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

Kong Wing, Clement CHOW, Ka Yiu, Michael FUNG, Kevin C. K. LAM, Heibatollah SAMI

Research output: Journal PublicationsJournal Article (refereed)

18 Citations (Scopus)

Abstract

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.
Original languageEnglish
Pages (from-to)367-389
Number of pages23
JournalReview of Quantitative Finance and Accounting
Volume38
Issue number3
DOIs
Publication statusPublished - 1 Apr 2012

Fingerprint

Private enterprise
Investment opportunity set
Political connections
China
Business policy
Factors
State-owned enterprises
Joint ventures
Private firms
Low pay
Transition economies
An enterprise
Board of directors
Policy implications
Bonus
Firm growth
Dividends
Business sector
Transitional economies

Keywords

  • Business policies
  • China
  • Investment opportunity
  • JEL classification G32
  • Political connection
  • Private enterprises

Cite this

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title = "Investment opportunity set, political connection and business policies of private enterprises in China",
abstract = "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.",
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Investment opportunity set, political connection and business policies of private enterprises in China. / CHOW, Kong Wing, Clement; FUNG, Ka Yiu, Michael; LAM, Kevin C. K.; SAMI, Heibatollah.

In: Review of Quantitative Finance and Accounting, Vol. 38, No. 3, 01.04.2012, p. 367-389.

Research output: Journal PublicationsJournal Article (refereed)

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