Political connections, overinvestments and firm performance: Evidence from Chinese listed real estate firms

- This paper examines the political connections of listed Chinese real estate firms.
- The paper measures political ties of all chief officers and board members.
- Political connections are positively related to long-term bank loans.
- Political connections are negatively related to return on assets.
- Political connections are positively related to corporate overinvestment.

Using a sample of 103 listed real estate firms from 1998 to 2012, this paper examines the influence of firms' political connections on external financing, corporate investment, and financial performance. The results indicate that political connections are negatively related to return on assets. Moreover, firms with stronger connections are financed with more long-term bank loans and are more likely to overinvest, which partially explains the puzzle of adverse effect of political connections on performance. Taken together, our results suggest that cultivating political connections could be a risky investment and may not always pay off.