Political Connections and Government Subsidies of the Companies Falling into Financial Distress-Empirical Evidence from Chinese ST Listed Companies

Using the samples of ST (Special Treat) companies listed in Shanghai and Shenzhen Stock Exchange from the year 2002 to 2007, this paper empirically studies the influences of the companies' political connection on how the companies falling into financial distress gains the government subsidies. The conclusions are as follows: firstly, when private companies fall into financial distress, its political connection has significant effect on the gaining of government subsidies; but it is insignificant for state-owned enterprises. Secondly, after considering the differences of regional environment the firm lying in, the paper finds that the superiority private firms hold in political connection is significantly affected by regional fiscal situation, while the functioning of the local government's intervention is also constrained by regional fiscal situation. Only when the local government has enough fiscal surplus, private enterprises can obtain more government subsidies through its political connections.