Financing constraints of firms: Is there political favoritism in the economic resources given by the central government?

Abstract

Economic resources within the jurisdiction of local governments in China shape the external financing environment of enterprises. However, few studies have focused on China's unique political hierarchy, which results in differentiated access to economic resources for different levels of local governments and substantially affects local corporate financing constraints. This paper examines the impact of city political hierarchy on firm financing constraints among Chinese A-share listed firms from 2004 to 2019. We use the 200,000 population criterion for delineating the political hierarchy of cities in 1927 as the cutoff for fuzzy regression discontinuity design to identify causal effects. The results show that the greater a city's political rank is, the lower its financing constraints are. The mechanism suggests that the central government provides more financial and political resources to high-level cities, directly and indirectly influencing the financing constraints of firms. In addition, high-level cities' government preferences, bank loans, debt financing costs, and business credit are vital channels at the firm level. However, this effect varies depending on the ownership and size of the firm.