Theoretical motives of corporate cash holdings and political connections: firms level evidence from a developing economy |
| |
Authors: | Abubakr Saeed Yacine Belghitar Ephraim Clark |
| |
Institution: | 1. Department of Management Sciences, COMSATS Institute of Information Technology, Islamabad, 44000, Pakistan;2. Cranfield School of Management, Cranfield University, Bedford, MK43 0AL, UK;3. Universite de Lille Nord de France SKEMA, France;4. ESSCA Business School, Angers and Paris-Dauphine University, 1 rue Lakanal, 49003, 75775 Paris, France |
| |
Abstract: | In this paper, we revisit the theoretical motives of corporate cash holdings while concentrating on the effect of political connections. In particular, we postulate two competing hypotheses for the effects that political connections can have on cash holdings: ‘substitution effect hypothesis’ and ‘complementary effect hypothesis’. Using the data on Pakistani firms over the period 2002–2010, we find that connected firms hold significantly larger cash reserves than their non-connected counterparts, thus confirming the ‘complementary hypothesis’, which suggests that agency problems lead connected firms to accumulate large amount of cash. Further, this effect is found to be more pronounced in dictatorial as opposed to democratic regimes indicating the presence of higher degrees of political patronage in that period. Finally, we also find differences in the complementary effect based on firm characteristics. Our results suggest that the firm size and leverage have increasing effects on the cash holdings of connected firms, contrary to the mainstream literature standpoint. |
| |
Keywords: | political connections cash holdings agency cost |
|
|