EAST ASIA WORKSHOP: POLITICS, ECONOMY & SOCIETY
“Macroeconomic Stimulus and the Distorting Effects of Political Connections: Evidence from China”
Chenli You
UIC Economics PhD Candidate
Feb 27, Wed 12:00-1:30 pm
Pick Lounge, 5828 South University Ave.
Pizza will be provided
Abstract
The global financial crisis of 2008 hit the Chinese economy severely, and in response, China launched its “four trillion-yuan stimulus package” to support the economy. Since China has a mixed economy that is both centrally planned and market-based, and therefore political relations play a significant role in resource allocation, companies with close relationships to central and local government have been likely to benefit more from the stimulus package. This research uses a difference-in-difference analysis of publicly listed companies in China from 2003 to 2012, comparing politically connected and non-politically connected firms before and after 2008. The empirical results suggest that after the adoption of the stimulus package, politically connected firms had about 7.1% higher leverage, 9.3% higher receivables, and 6.6% lower sales compared to firms lacking those political connections, even though the levels of investment, cash stock, and profit among all of these firms were not significantly different. My findings, that politically connected firms received a disproportionate amount of support from the stimulus package through increased leverage but performed worse in liquidity management, suggest that the stimulus package allocated resources inefficiently.
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The East Asia Workshop is sponsored by the Council on Advanced Studies in Humanities and Social Sciences.