The Effect of Political Connection on Derivatives Hedging in the Chinese Market

This paper examines the effects of political connection on derivatives hedging in the Chinese market from 2007 to 2018. Using a sample of privately-owned enterprises (POEs), this study hypothesizes and argues that the top managers or non-independent board directors who have current or previous political work experience exert a negative influence on a firm’s hedging incentives since these firms may benefit from governmental bailouts by building connections and resultantly have fewer motives to hedge. Similarly, state-owned enterprises (SOEs) are considered to have natural political connections as their ownership rests in the hands of the government, and therefore should have even fewer incentives to hedge compared with POEs. However, the results we obtain in this thesis do not support this widely held assumption. Interestingly, the financial background of top managers and board directors appears to have different effects on hedging activities in POEs and SOEs