Do personal political ties matter in SOEs’ access to bank credit? Evidence from China

Abstract

The role of personal political ties in State-owned enterprises (SOEs) remains under-investigated due to the difficulty of disentangling these ties from SOEs' inherent political connections. Leveraging China's anti-corruption campaign, this paper distinguishes between personal and inherent political ties within SOEs to explore the effect of personal political ties on access to bank credit. Using ordinary least squares and difference-in-difference models, we find that SOEs whose executives lose personal political ties receive significantly less bank credit, resulting in more severe financing constraints. In an attempt to compensate, these SOEs employ tax avoidance strategies, though these measures prove insufficient. Consequently, such SOEs reduce their investment in long-term assets while increasing investment in research and development. Furthermore, our study reveals that the negative impact of severed personal political ties on access to bank credit is more pronounced in SOEs with high state ownership. The reduction in personal political ties among SOEs following the anti-corruption campaign helps mitigate the misallocation of bank credit. Overall, this study identifies personal political ties as a key factor influencing SOEs' access to bank credit and provides new evidence on the effectiveness of China's anti-corruption campaign by categorizing SOEs' political ties into personal and inherent connections.