Ownership Structure, Institutional Development, and Political Extraction: Evidence from China

42 Pages Posted: 16 Jan 2011 Last revised: 21 Jan 2014

See all articles by Yuanto Kusnadi

Yuanto Kusnadi

Singapore Management University - School of Accountancy

Zhifeng Yang

Stony Brook University

Date Written: November 1, 2010

Abstract

This paper examines how ownership structure and institutional development influence the liquidity management and investment policies of firms, in response to the threat of political extraction in China. First, we document evidence that firms controlled by private entrepreneurs hold less cash reserves than their state-owned counterparts. In addition, cash holdings (investments) is positively (negatively) related to the strength of economic institutions. The results are consistent with the hypothesis that managers of private firms and firms located in provinces with weaker institutions have incentives to protect their assets from being expropriated by politicians, through holding less cash (which are easier to extract) and pursuing more investments in fixed assets (which are harder to extract). Finally, we find that firms with close connections to politicians hoard cash reserves and display lower investments than their non-connected counterparts. This suggests that political connections mitigate the threat of political extraction for those connected firms.

Keywords: extraction, cash holdings, investments, political connection

JEL Classification: D23, H7, K0, P2

Suggested Citation

Kusnadi, Yuanto and Yang, Zhifeng, Ownership Structure, Institutional Development, and Political Extraction: Evidence from China (November 1, 2010). CAAA Annual Conference 2011, Singapore Management University School of Accountancy Research Paper No. 2014-08, Available at SSRN: https://ssrn.com/abstract=1740184 or http://dx.doi.org/10.2139/ssrn.1740184

Yuanto Kusnadi (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore
+65 6808 5449 (Phone)

Zhifeng Yang

Stony Brook University ( email )

Health Science Center
Level 3, Room 043
Stony Brook, NY 11794-8322
United States

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