How does political connection affect firm financial distress and resolution in China?

We examine the impact of political connections on firm performance, financial distress, and its resolution in China, a country where government influence over stock markets has been demonstrated to be considerable. Our findings suggest that over 1999 to 2015, although political connections had limited impact on the emergence of financial distress, such connections assisted distressed firms in gaining increments to debt financing and contributed to a higher likelihood of recovery. This indicates that Chinese authorities follow market economy principles, and only intervene in firms’ operations after they fall into financial distress. In addition, central and local government political connections have different impacts on distress recovery. We conduct additional analyses on differences in distress outcomes for various ownership (State-owned enterprises, SOEs, and non–SOEs) and sample sub-periods (1999–2007 and 2008–2015). Our results are robust to potential endogeneity issues and to alternative measures of financial distress.