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The Role of Political Connection on Overinvestment of Chinese Energy Firms

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Document pages: 21 pages

Abstract: This paper explores the role of political connection on the overinvestment of Chinese energy firms. We argue that political connection can act as a “helping hand” that enables energy firms to obtain more government support to invest and a “grabbing hand” that forces politically connected energy firms to heavily overinvest for the promotion benefit of local politicians. Our analysis shows that overinvestment of an energy firm is positively affected by its political connection. In terms of the “helping hand” effects, we find that politically connected energy firms are more likely overinvest when they receive more government subsidy. In terms of the “grabbing hand” effects, we show that local politician is more likely to force energy firms to overinvest if the politician is approaching the 65-year-old promotion line. Although firms are less likely to overinvest during the economic downturn, local politician shapes the investment decision of energy firms through the “grabbing hand” effects.

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