This study investigates the role of princelings in Chinese listed firms. Our findings suggest that princelings ensure better access to bank loans for non-SOEs but bring no significant benefits to SOEs. Our empirical results further indicate that bank lending decisions are distorted for princeling-backed firms due to the privileges and protections they can obtain from the higher levels of the government through princelings' family ties. Moreover, we find that, due to excess long-term bank loans, princeling-backed non-SOEs tend to overinvest, which ultimately results in lower investment efficiency. Furthermore, we use the difference-in-difference method to capture the effect of the exogenous shock of the recent anti-corruption campaign in China on princelings and corporate finance and investment. We demonstrate that the anti-corruption campaign launched by the Chinese government in 2012 effectively weakened the power of princeling connections. Overall, our study suggests that by distorting bank lending decisions and encouraging overinvestment, the involvement of princelings in firms causes resource misallocation which favours princeling-backed firms and discourages investment in non-princeling-backed firms.
Available for download on Friday, May 21, 2021