Donation, political connection and credit access: The case of Chinese small and medium enterprises

Abstract

This paper studies the effects of donation activity on credit access for small and medium enterprises (SMEs). Based on a nationwide survey of private enterprises, our analysis suggests that Chinese entrepreneurs who donated more to charity in the previous year are more likely to obtain a loan from physical financial entities such as commercial banks. However, we do not find a similar effect on credit access through an online lending platform. Our results also revealed that the effect of donations on access to physical financing is more significant among firms without political connections. We attribute this finding to the strategic donation behavior of SMEs with few political ties, since donating more to charities could mitigate the disadvantage of less social capital on loan applications. SMEs strategically donate to ensure future government support. Our findings are robust to two alternative empirical specifications, where we split the sample by firms’ equity and use industry average donation as instrument for firm's choice of donation amount.