ISSN: 2226-3624
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This study examines the relationship between local political turnover, financing constraints, and corporate investment in China. Using 7,200 firm-year observations of A-share listed firms from 2004 to 2009, this study links changes in Municipal Party Committee Secretaries to investment–cash flow sensitivity. The baseline regression includes firm and year fixed effects. Other model settings examine family ownership, the successor origin and the provincial legal environment. At zero cash flow, political turnover is related to lower fixed asset investment, and its positive interaction with cash flow indicates a stronger relationship between investment and internal funds. The increase in investment–cash flow sensitivity is smaller for family businesses and is mainly concentrated in replacements involving nonlocal successors. A stronger legal environment is related to the smaller sensitivity increase after the replacement of officials. These results are consistent with political relations helping firms obtain external resources and formal institutions reducing dependence on these relations. However, investment–cash flow sensitivity is an indirect measure of financing constraints, and these estimates do not completely exclude other explanations related to investment opportunities or local economic conditions. Sample characteristics and model specifications limit the generalisability of these findings.
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