The loss of political connections and corporate financialization

Abstract

This paper examines firms' financial asset allocation motives from the perspective of loss of political connections. Based on listed companies in China's stock market, we show that the loss of political connections leads enterprises to hold more financial assets based on preventive saving motives, leading to a stronger tendency of financialization, and this effect is significant only among non-state enterprises but not among state enterprises. Meanwhile, non-SOEs with low debt financing levels tend to hold more financial assets, while non-SOEs with high debt financing capacity keep their financial investment levels relatively the same.