The 24th Academic Luncheon of the Digital Technology and Finance

Abstract：

This paper investigates the valuable but less studied stabilizing role of political connections during severe economic downturns when both the cost and benefit dynamics of political connections change dramatically. Using the 2007-2009 financial crisis as a natural experiment, we show that political connections protect firms from adverse shocks, especially when firms are financially more vulnerable, face greater challenges in capital-raising, but have relatively higher financing needs. Instead of increasing competition in the distressed bank credit market, political connections reduce firm risk and redirect corporate reliance toward alternative forms of external financing. This liquidity insurance generates an offsetting positive impact on corporate investments, benefiting firms in their performance and market shares. Additionally, political connections deliver a beneficial multiplier effect. Connected firms serve as liquidity intermediaries and redistribute credit to suppliers through trade credits. Overall, this paper highlights the bright side of political connections, emphasizing their crucial role in economic downturns.

Speaker Introduction：

Liu Shu, a lecturer in the School of Finance, Zhongnan University of Economics and Law, obtained her doctor's degree from City University of Hong Kong. Her academic papers have been published in many foreign high-quality journals and conferences, including FRL, FMA, AsianFA, SFA, EFMA, etc. She has hosted one youth project of the Ministry of Education and participated in several projects, including the National Natural Science Foundation of China and the National Social Science Key Project.