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An Empirical Study on the Relationship between Political Connections, Tax Subsidy and the Agricultural Listed Company’s Performance

Author: ShenMin
Tutor: WangJianMing
School: Nanjing University of Finance and Economics
Course: Accounting
Keywords: Agricultural Listed Companies Political Connection Subsidy Income Corporate Performance
CLC: F832.51;F224
Type: Master's thesis
Year: 2011
Downloads: 106
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Abstract


As a kind of hidden but valuable resource, a company’s political connections have gradually been concerned by more and more scholars and triggered a series of related research. Some studies pointed out that political connections will bring the company a lower tax rate, more convenient financing channels and more scarce resources, eventually improve the corporate performance. While some research indicates that though political connections can bring some advantages and convenience for enterprises, it still has a negative impact on the enterprise as a whole.In this paper, we took the agricultural listed companies as samples, using the annual cross-sectional and time series data, the sample period is from 2005 to 2009. We assumed that if one of the executive of the company has been or is being a member of central or local government, then the the company will be identified as one which has political connections.We found that about 42% of agricultural listed companies have political connections out of total 268 samples. In this study, we took senior executives’political background as a proxy variable for political connections, took ETR as a proxy variable for tax incentives, and used ROA, ROE and ROS as proxy variables for corporate performance. On this basis, the paper examines if the agricultural listed companies which have political connections are more likely to get tax breaks, subsidies and other advantages. Also we analyzed the impact of political connection to the enterprise’s performance. Besides, we conducted some environmental factors, the key internal factors of listed companies as control variables to make our econometric model more reliable. In addition, the paper also creatively introduce the external policy change to our model. For example, in the tax incentives model, we examined the implementation of the new Enterprise Income Tax Law on the effects of political affiliation conclusion of tax incentives; in the subsidy income model, we investigated the implementation of new accounting standards on the conclusions of subsidy income.The empirical results show that compared to those companies without political connection, the politically connected agricultural listed companies often have some significant business advantages, such as lower tax rate, more income subsidy. But the political connection did not enhance the performance of agricultural listed companies, but had a negative impact on its.Finally, we also made two additional tests. About the model for the tax incentives, considering there is no uniform method for calculating the ETR, we used different methods to calculate the ETR to ensure the credibility of our model. The conclusion shows pretty consistent with the regression result. Another is the Econometric model for the subsidy, we excluded the impact generated by the implementation of new accounting standards. So we examined the agricultural listed companies from 2007 to 20009, the test results shows consistent with our previous conclusions.

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CLC: > Economic > Economic planning and management > Economic calculation, economic and mathematical methods > Economic and mathematical methods
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