Political Connections, Financing Friction, and Corporate Investment: Evidence from Chinese Listed Family Firms

Using a sample of Chinese family firms from 2000 to 2007, we investigate the investment behaviour of family firms and the effects of these firms' political connectedness on their investments in a relationship-based economy. Consistent with previous evidence that Chinese family firms have difficulty in financing, our results demonstrate that underinvestment due to problems with asymmetric information rather than overinvestment resulting from problems of free cash flow prevails in such firms. We further find that the political connectedness of family firms can help mitigate the underinvestment problem, with the mitigation effect being more pronounced in financially constrained firms.