Political relationship and the efficiency of credit resource allocation: Evidence from China

Abstract

This paper examines the impacts of informal and formal institutions on the efficiency of credit resource allocation in the emerging market from the perspective of political connections and marketization. Based on the data of non-state owned listed companies in China, we find that as an informal institution, Political relationship helps companies to obtain more long-term loans. However, from a social perspective, such a credit resource allocation is inefficient because the companies obtaining loans via relationship are more likely to overinvest. Nevertheless, marketization, as a formal institution, helps weakening the impact of relationship on credit resource allocation, improving the efficiency of resource usage.