Funding Liquidity, Political Geography, and Private Equity Performance: Evidence from China

We investigate the relationship between funding liquidity and PE firm performance. We further develop a locally political alignment indicator (PAI) and then investigate whether PAI has an impact on the relationship between funding liquidity and PE firm performance. A higher required reserve ratio implies lower funding liquidity in the context of China. We find that the required reserve ratio is negatively related to PE firm performance significantly. When the most important local leaders belong to the partisan of the supreme leader, the negative reaction of local firms' performance to a change in funding liquidity strengthens significantly.