Implications of public corruption for local firms: Evidence from corporate debt maturity

Using political corruption conviction data from the U.S. Department of Justice, we examine the impact of local corruption on firms’ debt maturity structure while exploring both demand-side and supply-side explanations. Our results support the demand-side story and indicate that firms in high corruption areas utilize less short-term debt to mitigate liquidity and refinancing risks. Consistent with this, we find the effect is more pronounced among firms with smaller size, lower asset redeployability, and higher volatility. Our findings remain robust to the inclusion of an array of controls expected to influence debt maturity preferences as well as time, industry, and state fixed effects. Moreover, a seemingly unrelated regression approach, instrumental variables regression, propensity score matching, placebo analyses, and alternative corruption measures corroborate our findings. Altogether, our results indicate that firms alter their debt maturity choices in response to local corruption to limit refinancing risk and the uncertainty created by corrupt government officials.     

Firm-level political risk and earnings opacity

Given the recent growing global uncertainties, firms have encountered increasing political risks and responded accordingly to avoid a negative impact on their performance. This study examines the impact of firm-level political risk on corporate earnings opacity among listed U.S. firms. Our empirical results reveal that higher firm-level political risk engenders greater corporate earnings opacity via three channels of market scrutiny, political proximity, and multiple business objectives. Further analyses show that politically risky firms are more prudent in earnings management when they are highly dependent on government spending. The results hold after a wide range of robustness tests. Our findings provide several implications for the management of earnings quality in response to increasing firm-level political risk in the U.S.     

Local corruption and corporate cash holdings: Sheltering assets or agency conflict?

This study investigates the impact of corruption on corporate cash holdings in China. The political extraction argument predicts that firms might shelter liquid assets to avoid extraction by corrupt officials. Using data on A-shared listed firms between 2007 and 2012, we find that firms located in more corrupt regions hold less cash, supporting this hypothesis. Political resources help to diminish the risk of exploitation, reducing the extent to which liquid assets are sheltered. We find that the negative association between corruption and cash holding is more significant for non-state-owned enterprises (Non-SOEs) than for state-owned enterprises (SOEs). Moreover, the cash holdings of Non-SOEs without political connections are more sensitive to corruption than those of Non-SOEs with political connections. These findings demonstrate that expropriation by corrupt officials is an important factor driving firms to manage liquidity.     

U.S. POLITICAL CORRUPTION AND LOAN PRICING

Using U.S. Department of Justice data on state-level political corruption, we find that banks charge higher loan spreads (all-in-drawn spreads) to firms in states with higher corruption and that these effects are more pronounced for firms facing financial constraints but less pronounced for firms experiencing greater external monitoring. These results are robust to additional controls, alternative corruption measures, a measure of the lack of oversight of lobbyist activities, and the use of instrumental variables. Overall, our findings are consistent with the harmful corruption environment hypothesis, which states that banks charge higher loan spreads to firms in states with greater political corruption environments as these firms are susceptible to making suboptimal financial decisions to fend off rent-seeking behavior.     

Liquid asset sheltering,or cost of capital? The effect of political corruption on corporate cash holdings

I posit that political corruption affects firms through an entrenchment between entrepreneurs and politicians instead of coercive extortion. Based on this postulate, I refute the claim that firms in a more corrupt environment hold less cash due to liquid assets sheltering from political extraction. Instead, I propose that firms in a more corrupt environment hold less cash because of the high cost of capital. In fact, I find that firms in more corrupt countries hold cash beyond their optimum for the given cost of carry due to severe financial constraints. This excess cash results in value destruction. I call this phenomenon the financial effect of corruption. Thus, I challenge the conventional wisdom and argue that the effects of political corruption on corporate cash holdings are primarily indirect through financial mechanisms.     

Corruption,growth, and governance: Private vs. state-owned firms in Vietnam

We provide a firm-level analysis of the relation between corruption and growth for private firms and state-owned enterprises (SOEs) in Vietnam. We obtain three different measures of the perceived corruption severity from a 2005 survey among 741 private firms and 133 SOEs. We find that corruption hampers the growth of Vietnam’s private sector, but is not detrimental for growth in the state sector. We document significant differences in the corruption severity across 24 provinces in Vietnam that can be explained by the quality of provincial public governance (such as the costs of new business entry, land access, and private sector development policies). Our results suggest that corruption may harm economic growth because it favors the state sector at the expense of the private sector and that improving the quality of local public governance can help to mitigate corruption and stimulate economic growth.     

Ownership and the Value of Political Connections: Evidence from China

Research has found that political connectedness can have both positive and negative effects on firm value. To resolve these mixed findings, we investigate the impact of political ties conditional on ownership for a sample of Chinese firms over the period 1999–2006. We find that private firms with politically connected managers have a higher value and obtain more government subsidies than those without connected managers, whereas local state‐owned enterprises with connected managers have a lower value and employ more surplus labour than those without connected managers. Our results indicate that the effect of political ties is subject to firm ownership.     

Paving the way for children: Family firm succession and corporate philanthropy in China

We investigate whether internal succession in family firms motivates founders to engage in corporate philanthropy. We argue that founders who intend to pass control of the firm to their children are likely to prepare for the internal succession by building up family assets such as reputation and political connections through corporate philanthropy. Supporting our argument, we find that both the likelihood and the amount of philanthropic donations increase when listed family firms in China are in the internal succession process. The effect of successions on philanthropic donations is stronger for family firms that have political connections or are located in areas with stronger government influence in the local economy. The effect concentrates on family firms when heirs are young and inexperienced. When heirs are established, family firms actually make fewer philanthropic donations. Our results remain robust after addressing endogeneity issues.     

Political corruption and accounting choices

We examine how political corruption affects firms’ accounting choices. We hypothesize and find that firms headquartered in corrupt districts manipulate earnings downwards, relative to firms headquartered elsewhere. Our finding is robust to alternative corruption measures, alternative discretionary accrual measures, alternative model specifications, the instrumental variable approach and difference-in-differences analyses based on firm relocation and high profile cases. We find that firms headquartered in corrupt districts prefer income-decreasing accounting choices and exhibit higher conservatism. Finally, we find that the effect of corruption on earnings management is more pronounced for geographically concentrated firms, for firms without political connections, for firms in politically sensitive industries, for firms with lower transient institutional investor ownership and for firms with less analyst coverage. In sum, our findings suggest that firms respond to corruption by lowering their accounting earnings.     

Political connections,media monitoring and long-term loans

We analyze data on Chinese non-state-listed firms and find that it is easier for firms with political connections to obtain long-term loans with extended debt maturities than it is for firms without political connections. Our investigation indicates that this phenomenon is significantly less common with increased media monitoring. Houston et al.(2011) find strong evidence that the state ownership of media is associated with higher levels of bank corruption in China, but our study shows that, to a certain extent, media monitoring can curb corruption.     

How do family ownership,control and management affect firm value?

Using proxy data on all Fortune-500 firms during 1994–2000, we find that family ownership creates value only when the founder serves as CEO of the family firm or as Chairman with a hired CEO. Dual share classes, pyramids, and voting agreements reduce the founder's premium. When descendants serve as CEOs, firm value is destroyed. Our findings suggest that the classic owner-manager conflict in nonfamily firms is more costly than the conflict between family and nonfamily shareholders in founder-CEO firms. However, the conflict between family and nonfamily shareholders in descendant-CEO firms is more costly than the owner-manager conflict in nonfamily firms.     

Macroeconomic control, political costs and earnings management: Evidence from Chinese listed real estate companies

Firms in China have faced high political costs during China’s economic transition, because they are affected by macroeconomic policies. However, research to date has offered no consistent conclusions on the relationship between political costs and earnings management in China. This study tests whether real estate firms attempt to decrease earnings during periods of macroeconomic control, using variables related to the national real estate market as proxies for political costs. We find that political costs are negatively related to earnings management in listed real estate firms. In addition, we find that non-state-owned enterprises utilized more income-decreasing accruals during this period. Our results are consistent with the political costs hypothesis.     

How do US investors perceive the risk of local political corruption? Evidence from acquisition announcement

This study examines the impact of local political corruption on investors’ evaluation of firms’ mergers and acquisitions (M&As) in the US. Using the number of corruption convictions of government officials reported by the US Department of Justice, we find that acquirers in more corrupt court districts experience lower acquirer announcement returns, lower combined acquirer and target announcement returns, and are less likely to complete acquisitions. We further find that the relation between local political corruption and acquirer announcement returns is worsened when acquirers operate primarily in the headquarters state. Overall, the results suggest that local political corruption has an adverse impact on investors’ evaluation of a firm’s M&A profitability.     

Bank discrimination, holding bank ownership, and economic consequences: Evidence from China

This paper finds that compared with Chinese state-owned firms, non-state-owned firms have a greater propensity to hold significant ownership in commercial banks. These results are consistent with the notion that because non-state-owned firms are more likely to suffer bank discrimination for political reasons, they tend to address their financing disadvantages by building economic bonds with banks. We also find that among non-state-owned firms, those that hold significant bank ownership have lower interest expenses, and are less likely to increase cash holdings but more likely to obtain short-term loans when the government monetary policy is tight. These results suggest that the firms building economic bonds with banks can enjoy benefits such as lower financial expenses and better lending terms during difficult times. Finally, we find that non-state-owned firms with significant bank ownership have better operating performance. Overall, we find that firms can reduce discrimination through holding bank ownership.     

Local political corruption and Firm's non-GAAP reporting

We examine whether local political corruption affects managers' discretionary disclosures of non-GAAP earnings. Using United States Department of Justice data on the number of corruption convictions of government officials, we find that firms headquartered in more corrupt districts (1) are less likely to report non-GAAP earnings, (2) have less aggressive non-GAAP earnings disclosures, and (3) experience a significant decline in the exclusion magnitudes of non-GAAP earnings. These results are more pronounced for firms with concentrated operations in their headquarter states and are robust to controlling for demographic characteristics, employing alternative corruption and non-GAAP measures, using the instrumental variable approach, and conducting a difference-in-difference analysis based on firms' relocation. Finally, we show that as local political corruption increases, managers exclude lower levels of both recurring and non-recurring items when calculating non-GAAP earnings. Overall, the results suggest that managing non-GAAP reporting is one channel through which firms could deter rent-seeking by corrupt officials.     

Bond Market Access,Credit Quality,and Capital Structure: Canadian Evidence

We examine the impact of bond market access (measured by having a credit rating) on leverage for Canadian high credit quality (HQ) and low credit quality (LQ) firms, and find that the leverage impact is more pronounced for LQ firms. The results are similar for U.S. firms. Our results are confirmed when we control for the firm's credit quality, examine the change in leverage around rating initiation, and account for the issue size effect. A similar leverage impact for Canadian and U.S. LQ firms suggests that the Canada‐U.S. bond market integration has mitigated the financial constraints for Canadian LQ firms.     

Security analysis, agency costs, and UK firm characteristics

The paper examines the monitoring power of security analysts from the manager-shareholder conflict perspective. Our evidence supports the view that security analysis acts as a monitoring mechanism in reducing agency costs for smaller as opposed to larger firms. Moreover, we also find evidence that security analysis has a positive and significant impact on firm value only for smaller firms. These findings support the proposition that, as firms grow larger and more complex, the monitoring activity of security analysis becomes less effective. Our evidence also shows that the monitoring role of security analysts is not restricted to the US capital market environment.     

THE IMPACT OF POLITICAL CONNECTIONS ON FIRMS’ OPERATING PERFORMANCE AND FINANCING DECISIONS

We investigate the impact that the political connections of publicly traded firms have on their performance and financing decisions. Using a long‐term event study covering a sample of 234 politically connected firms headquartered in 12 developed and 11 developing countries from 1989 to 2003, we find that firms increase their performance and indebtedness after the establishment of a political connection. We also find that the political connection is more strongly associated with changes in leverage and operating performance for firms with closer ties to political power. Overall, our study confirms that politically connected firms gain easier access to credit and reap benefits in terms of performance from their ties with politicians.     

Earnings credibility in politically connected family firms

We investigate whether politically connected family firms provide the market with more or less credible earnings compared with unconnected family firms. Our results evidence that politically connected family firms show higher earnings informativeness than unconnected family firms. Our findings are consistent with the market perceiving that, in the presence of political ties, family firms are more likely to reduce information asymmetries by signalling their superior earnings quality.     

The “home bias” of corporate subsidiary locations

Analyzing hand-collected data on the corporate subsidiary locations of all publicly listed firms in China, we find that “hometown firms,” firms headquartered in the hometown of the key political leaders of the province, set up more subsidiaries in their home provinces. This effect is stronger for hometown firms that are non-state owned or without political connections, and more prominent in a political turnover year and the previous year. After a hometown firm sets up more subsidiaries in a key political leader's home province, the firm will enjoy more preferential government policies such as those related to subsidies and taxes. We find evidence consistent with the positive externalities of these subsidiaries for other firms in the cities where they reside, i.e., local firms. The number of these subsidiaries is also positively associated with the local employment rate. Various causality tests and robustness checks confirm the validity of our results. Our results provide some of the first evidence on the importance of corporate subsidiary locations, showing political geography significantly influences corporate geography.