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Political connections, over-investment and equity governance effect

Author(s): Zhao Yan, Jinlong Chen, Peng-jie Sun

Based on the rent-seeking as research perspective in this paper, explored the relationship between political connections and over-investment, analyzed the effect that equity governance restrained over-investment. The empirical results showed that over-investment under political connections was a way of achieving interest demands between private enterprises and local government. Political connection strength and political connection hierarchy contributed to over-investment. The fundamental goal of large shareholders to establish political connections was to implement own maximized interests. In order to obtain exceeding profit, private enterprises implemented over-investment to meet investment demand of local governments with political connections. Exceeding profit conformed to the maximizing interests of major shareholders, the equity governance had incentive effect on over-investment with political connections. General meeting of shareholders and circulating shares had constraint effect on over-investment, Equity balance degree restricted overinvestment. The research conclusions of this paper enriched and deepened theory research on equity governance affected over-investment.

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