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Tag: Corporate Finance & Risk

  • Political connections are linked to lower corporate innovation

    Political connections are linked to lower corporate innovation

    What the study found

    The study found that firms with political connections tend to show lower innovation performance. It also found that research and development (R&D) investment intensity is one way this relationship operates, while dynamic capabilities and board independence can reduce the negative effect.

    Why the authors say this matters

    The authors conclude that the study clarifies the "innovation paradox" of political ties, meaning the tension between political connections and innovation outcomes. They say the findings provide micro-level governance evidence and suggest ways for regulators and firm managers to reduce the innovation costs associated with political connections.

    What the researchers tested

    The researchers used regression analysis with panel data from 5,549 Chinese listed companies between 2008 and 2021. They drew on dynamic capability theory and a non-market perspective to test how political connections relate to corporate innovation performance and what factors moderate that relationship.

    What worked and what didn't

    Political connections were found to have a negative influence on innovation. R&D investment intensity was identified as the channel through which political connections affect innovation, while dynamic capabilities and board independence mitigated the negative effect. The negative impact was especially prominent in state-owned and technology-intensive enterprises compared with non-state-owned and non-technology-intensive enterprises.

    What to keep in mind

    The abstract does not describe specific study limitations. The findings are based on Chinese listed companies, so the reported results are tied to that sample and context.

    • Political connections were associated with lower innovation performance.
    • R&D investment intensity was identified as the mechanism linking political connections to innovation.
    • Dynamic capabilities and board independence reduced the negative effect.
    • The negative association was stronger in state-owned and technology-intensive firms.
    • The study used panel data from 5,549 Chinese listed companies from 2008 to 2021.

  • Entrepreneurial overconfidence shapes SME loan outcomes

    What the study found

    The study found a nonlinear relationship between entrepreneurial overconfidence and small and medium-sized enterprise (SME) financing outcomes. In the sample studied, mildly overconfident entrepreneurs were less likely to receive the loans they applied for than both unconfident and extremely overconfident entrepreneurs.

    Why the authors say this matters

    The authors say this matters because they argue that moderate overconfidence may lead entrepreneurs to make costly efforts that financiers view as a favorable signal. The study suggests this trade-off helps explain why overconfidence does not simply lead to worse financing outcomes in a straight line.

    What the researchers tested

    The researchers tested how entrepreneurial underconfidence and overconfidence were related to external financing decisions and outcomes for SMEs. They used a large sample of U.K. small and medium-sized enterprises and a novel measure of overconfidence.

    What worked and what didn't

    The study reports significant nonlinear relationships between overconfidence and measures of financial demand and supply. It also finds that mildly overconfident entrepreneurs were less likely to obtain the loans they applied for than both unconfident and extremely overconfident entrepreneurs.

    What to keep in mind

    The abstract does not describe detailed limitations, and the summary is limited to U.K. SMEs. The findings are reported for the measures and sample used in this study.

    • The study examined how entrepreneurial underconfidence and overconfidence relate to SME external financing.
    • A large sample of U.K. SMEs was used with a novel overconfidence measure.
    • The relationship between overconfidence and financing outcomes was significant and nonlinear.
    • Mildly overconfident entrepreneurs were less likely to receive the loans they applied for than unconfident and extremely overconfident entrepreneurs.
    • The authors argue that moderate overconfidence may signal costly effort to financiers.