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Bentley Finance Professor Mengxin Zhao Receives Best Paper Award From Chinese Finance Association

December 5, 2006

Bentley College Assistant Professor of Finance Mengxin Zhao is the recipient of the Best Paper Award from the Chinese Finance Association for the paper, "Rent Seeking and Corporate Finance: Evidence from Corruption."

According to Professor Zhao, China is a country plagued by corruption problems and high corporate sector debt. The paper investigates firms with political connections and examines how those connections can lead to extraordinary profit opportunities compared to firms without government affiliations.

"We looked at how state-owned enterprises gain financial capital and business opportunities to achieve growth," Zhao explains. "From the development of financial markets, we examined the importance of debt financing in China, rather than equity financing."

"Bank loans are still the main source of capital, and most loans are from the Big Four government-owned banks. That is why the connection with government officials provides the advantage of the company raising debt capital."

Research was based on 23 high-level government officer corruption cases, examining when the government official was arrested due to corruption, and how those firms that bribed or were connected with the arrested official were impacted in terms of bank financing and performance. Results of the study showed that connections help firms gain financing advantage. "When firms lose the connection, these advantages disappear," Zhao notes.

Zhao co-wrote the paper with Joseph P.H. Fan and Oliver Meng Rui, of the Chinese University of Hong Kong. Zhao's research interests are in the field of corporate finance and corporate governance. The above-referenced study focuses on corporate financing in an emerging market, and responds to the significance of emerging market research and the fast growth of China's economy.


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