Do political connections cause over-indebtedness? Empirical evidence from China’s listed construction firms

Abstract

PurposeThis study aims to investigate the relationship between political connections and the over-indebtedness of firms in the construction industry. Furthermore, this study explores the moderating effect of corporate governance mechanisms with monitoring intent on this relationship.Design/methodology/approachThis study uses the data from China’s listed construction firms for the years 2010–2019 to run the fixed-effect regression. This study constructs the optimal capital structure mathematical model by following the trade-off approach.FindingsThe research results show that most of China’s listed construction firms are surprisingly over-indebted in the long run. This study affirms that political connections positively impact the over-indebtedness of China’s listed construction firms. However, corporate governance can alleviate the impact of political connections on the over-indebtedness of China’s listed construction firms.Originality/valueThere were limited studies to discuss the relationship between political connections and the over-indebtedness of construction firms, and no particular attention has been given to the moderating effect of corporate governance mechanisms on the relationship between political connections and over-indebtedness. Moreover, in calculating the over-indebtedness of China’s listed construction firms, this study considers the financial characteristics of China’s construction firms when building the mathematical model of optimal capital structure, which makes the calculation results of over-indebtedness closer to reality.