Political connection and credit risk of real estate enterprises: evidence from stock market - Humanities and Social Sciences Communications
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Although extensive research has examined the credit risk of real estate enterprises, the relationship between the political connection of real estate enterprises and these enterprises’ credit risk has not been formally studied. Using the panel data of 123 real estate listed companies in the Chinese stock market from 2008 to 2021, this paper finds a significant positive correlation between the political connection of private real estate listed companies and their credit risk. This phenomenon is attributed to the excessive debt that benefits from political connections since it may raise the credit risk of any real estate firm. Interestingly, considering that 2013 is the first year of China’s Internet finance era, we find that the popularity of Internet finance and other decentralized lending financing channels may enhance the impact of political connections on real estate credit risk. Our findings provide new micro evidence for the influencing factors and mechanism of credit risk of real estate enterprises during the recent “credit crisis” in the real estate market in China.

A new study published in Nature observed that stronger political connections in private listed real estate firms in China positively correlate with increased levels of excessive debt and heightened debt repayment pressures, culminating in an accumulation of credit risks.

The main reasons for private real estate companies’ excessive debt in order to expand investment are as follows.

First, politically connected enterprises are more likely to obtain financing and increase the book-free cash flow, while the over-investment theory believes that the increase in book-free cash flow means an increase of over-investment probability.

Second, real estate has always been an important growth point of the local government’s economy, “GDP doctrine” before the economic transformation and upgrading often makes local government require its associated real estate enterprises to expand investment more blindly.

Third, the professional knowledge of senior executives transferred from government departments is often lacking, and they are more likely to pursue short-term interests and over-invest. Eventually, excessive liabilities will be formed.