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)peer-review

38 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

Bibliographical note

The authors are grateful to Bin Ke, Hung-Gay Fung, Yaw Mensah, Gordon Richardson, Hugh Thomas and the participants of the 31st Annual Congress of the European Accounting Association (April 2008—Rotterdam, The Netherlands), 2008 Annual Conference of the Canadian Academic Accounting Association (May 2008—Winnipeg, Canada) and the discussant, Sung Kwon, the 2008 Annual Conference of the American Accounting Association (August 2008—Anaheim, CA) and several anonymous reviewers for their comments on this paper.

Keywords

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

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