Political connection is one of the hotly debated global issues in financial economics in recent years. However, very few studies have focused on political connection and financial constraints in enterprises operating in different institutional environments. China is known for its unique institutional environment and unbalanced regional economic growth. China's economy is in transition to market economy. The transition is led by the Chinese government. It is important to examine how political connection plays its role in enterprises to reduce financial constraints especially for their business expansion in China. Hence, this study examines the relationship between institutional1 environment, political connection and financial constraints of private listed enterprises in
China. This study uses a sample of 3, 911 private listed enterprises in Shanghai and Shenzhen Stock Exchange Market. The data is obtained from WIND and CSMAR database for the period of 2008-2011. Multiple regression models are used to provide answers to the research questions developed in this study. The results show the existence of political connection and strength of such connection has significant influence on reducing enterprises' financial constraints, Political connection helps private listed enterprises access to bank credits, reduce their financial constraints, expand their business enterprises and promote private economic development in China. The findings also show that institutional environment has a significant positive effect in reducing financial constraints. In addition, institutional environment is found to have a moderating effect on the relationship between political connection and financial constraints. The most important contribution of this study is it expands current knowledge on the effect of institutional environment and political connection on private enterprises' financial constraints. This has policy implications for future government initiatives in strengthening the regulations to restrict political connection in order to achieve transformation of government governance, development of financial market and improving the legal system in China
