Political Connections and Corporate Bailouts

We analyze the likelihood of government bailouts of 450 politically connected firms from 35 countries during 1997–2002. Politically connected firms are significantly more likely to be bailed out than similar nonconnected firms. Additionally, politically connected firms are disproportionately more likely to be bailed out when the International Monetary Fund or the World Bank provides financial assistance to the firm's home government. Further, among bailed‐out firms, those that are politically connected exhibit significantly worse financial performance than their nonconnected peers at the time of and following the bailout. This evidence suggests that, at least in some countries, political connections influence the allocation of capital through the mechanism of financial assistance when connected companies confront economic distress.     

Political connections and the cost of equity capital

Motivated by recent research on the costs and benefits of political connection, we examine the cost of equity capital of politically connected firms. Using propensity score matching models, we find that politically connected firms enjoy a lower cost of equity capital than their non-connected peers. We find further that political connections are more valuable for firms with stronger ties to political power. In additional analyses, we find that the effect of political connection on firms' equity financing costs is influenced by the prevailing country-level institutional and political environment, and by firm characteristics. Taken together, our findings provide strong evidence that investors require a lower cost of capital for politically connected firms, which suggests that politically connected firms are generally considered less risky than non-connected firms.     

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.     

Does political connection distort competition and encourage corporate risk taking? International evidence

We investigate the impact of political connection on corporate risk-taking by connected firms, their industry counterparts, as well as non-rival firms from 48 countries. We find that political connection induces higher risk taking by connected firms. By contrast, we do not find evidence that political connection, with the attendant potential competitive distortions in the industry, induces higher risk taking by competitors. We focus on non-financial industries. Our results are consistent with the hypothesis that the inability to avail themselves of political rents compels the non-connected rivals to adopt more conservative strategies. However, large rival firms, generally considered to be too-important-to-fail, exhibit evidence of higher risk taking. The top size quartile industry rivals take as much risk as the politically connected firms. The higher risk exhibited by large rivals of politically connected firms suggests that our baseline regression results of lower risk-taking among rivals of politically connected firms are biased upward by firms that would be considered too-big-to-fail. This finding also suggests that the too-big-to fail phenomenon is not unique to banks. Our results are robust to the use of alternative measures of risk, to the exclusion of privatized and state-owned firms, and to controlling for the effects of financial crisis.     

Political Connections and Related Party Transactions: Evidence from Indonesia

This paper examines whether politically connected firms use related party transactions as a tunneling mechanism in Indonesia. We further investigate whether the presence of tunneling compels managers to manage earnings to conceal such expropriation of resources. Our study is motivated by conflicting evidence in the extant literature about the role of political connections and related party transactions. Using data from Indonesia, we document that politically connected firms use related party loans to tunnel resources, and that this effect is more pronounced for firms with government connections. We further document that politically connected firms manage earnings to conceal their tunneling activities. By documenting the role of related party transactions as a specific channel through which connected firms expropriate resources, we enrich the political connection and related party transactions literature.     

Cash holdings of politically connected firms

Politically connected firms benefit from soft-budget constraints and are unlikely to suffer from liquidity constraints. This argument suggests that politically connected firms should hold less cash than non-connected peers. Another view posits that these firms exhibit acute corporate governance problems. In this setting, politically connected firms are more likely to hold more cash than non-connected firms. Using a sample of 50,119 firm-year observations from 31 countries, we find that politically connected firms hold more cash than their non-connected peers. We put forth two explanations for this result. Firstly, politicians use politically connected firms as “cash cows” to advance their political agendas. Secondly, political connections are conducive to agency problems. In additional analyses, we find that the positive relationship between political connections and cash holdings is stronger when corporate governance is weak.     

Political considerations in the decision of Chinese SOEs to list in Hong Kong

This paper investigates why Chinese state-owned enterprises (SOEs) with strong political connections (i.e., politically connected firms) are more likely to list overseas than non-politically connected firms. We find that connected firms' post-overseas listing performance is worse than that of non-connected firms. This evidence suggests that connected firms' managers list their firms overseas for private (political) benefits. Consistent with this private benefits explanation, we further find that connected firms' managers are more likely to receive political media coverage or a promotion to a senior government position subsequent to overseas listing than domestic listing.     

Politically Connected Private Equity and Employment

We investigate the employment consequences of private equity buyouts. We find evidence of higher job creation, on average, at the establishments operated by targets of politically connected private equity firms than at those operated by targets of nonconnected private equity firms. Consistent with an exchange of favors story, establishments operated by targets of politically connected private equity firms increase employment more during election years and in states with high levels of corruption. In additional analyses, we provide evidence of specific benefits experienced by target firms from their political connections. Our results are robust to tests designed to mitigate selection concerns.     

Auditors' Response to Political Connections and Cronyism in Malaysia

This paper extends the literature on the role of political economy in financial reporting and auditing by testing two hypotheses. The first hypothesis predicts that there will be a greater increase in audit effort and audit fees for Malaysian firms with political connections, as a result of the Asian financial crisis, than for non‐politically connected firms because these firms have a higher risk of financial misstatements. The second hypothesis predicts that the audit fees of politically connected firms will decline when capital controls are introduced by the government as a ploy to financially assist politically connected firms to rebound from the crisis, and thus reduces the risk of financial misstatements. The results show that there is a greater increase in audit fees for firms with political connections than for non‐politically connected firms as a result of the Asian financial crisis. However, there is a decline in audit fees for politically connected firms after the capital controls are implemented.     

The politics of government investment

This paper investigates the relation between corporate political connections and government investment. We study various forms of political influence, ranging from passive connections between firms and politicians, such as those based on politicians’ voting districts, to active forms, such as lobbying, campaign contributions, and employment of connected directors. Using hand-collected data on firm applications for capital under the Troubled Asset Relief Program (TARP), we find that politically connected firms are more likely to be funded, controlling for other characteristics. Yet investments in politically connected firms underperform those in unconnected firms. Overall, we show that connections between firms and regulators are associated with distortions in investment efficiency.     

Political connections,tax benefits and firm performance: Evidence from China

This paper investigates the different effects of political connections on the firm performance of state-owned enterprises (SOEs) and privately owned enterprises. Using data on Chinese listed firms from 1999 to 2007, we find that private firms with politically connected managers outperform those without such managers, whereas local SOEs with connected managers underperform those without such managers. Moreover, we find that private firms with politically connected managers enjoy tax benefits, whereas local SOEs with politically connected managers are prone to more severe over-investment problems. Our study reconciles the mixed findings of previous studies on the effect of political connections on firm performance.     

Elections and Discretionary Accruals: Evidence from 2004

We examine the accrual choices of outsourcing firms with links to U.S. congressional candidates during the 2004 elections, when corporate outsourcing was a major campaign issue. We find that politically connected firms with more extensive outsourcing activities have more income‐decreasing discretionary accruals. Further, relative to adjacent periods, the evidence is concentrated in the two calendar quarters immediately preceding the 2004 election, consistent with heightened incentives for firms to manage earnings during the election season. The incentives can be attributed to donor firms' concerns about the potentially negative consequences of scrutiny over outsourcing for themselves and for their affiliated candidates.     

Bank Loan Supply in the Financial Crisis: Evidence from the Role of Political Connection

We investigate the changes in bank loan supply during the 2007–2008 financial crisis, with particular focus on the influence of political connections. We demonstrate that although political connections can help firms obtain lower loan rates during the precrisis period, such benefits disappear in the postcrisis period. Moreover, the loan acceptance ratio for politically connected firms is enhanced in the postcrisis period, especially for the politically connected firms with high risks. Evidence reveals that the focus of the benefits for politically connected firms is more likely to shift from the loan rate to the loan acceptance ratio during the postcrisis period.     

Do political connections affect the role of independent audit committees and CEO Duality? Some evidence from Malaysian audit pricing

This study examines whether political connection to firms affects the association between audit committee independence and demand for higher quality audits. In line with Carcello et al. (2002), our findings show that there is a positive association between audit committee independence and audit fees thus supporting the hypothesis that more independent audit committees demand higher audit quality. However, we find that this relationship is weaker for politically connected (PCON) firms suggesting that the independence of audit committees in Malaysian PCON firms may be compromised. Additionally, we provide evidence that PCON firms that have CEO duality are perceived by audit firms as being of higher risk than CEO duality firms without political connection.     

Political connections,environmental violations and punishment: Evidence from heavily polluting firms

Using hand-collected data on violations of environmental regulations by heavily polluting firms in China, we examine the relationship between political connections and the probability of punishment for breach of such regulations. To this end, we exploit a regulatory reform, the enactment of Rule 18, a key component of China's anti-corruption campaign, which required politically connected independent directors to resign from their positions. Using difference-in-differences specifications, we find that firms from which politically connected directors resigned due to Rule 18 experience a significant increase in both the likelihood of ever being punished for environment-related violations and the frequency of punishment. The effect of Rule 18 is more pronounced among firms located in regions with less efficient judicial systems and higher levels of corruption, as well as firms that are not state-owned. Our evidence indicates that in the absence of effective regulation, political connections can be costly to the environment as they strongly affect the enforcement of environmental regulations.     

Protection or expropriation: Politically connected independent directors in China

This paper empirically investigates politically connected independent directors among Chinese listed firms using 7487 firm-year observations from the Shanghai stock exchange during the period of 2003–2012. We distinguish between privately controlled firms and state-controlled firms. We find that the value effect and incentives of appointing independent directors with political ties are shaped by a firm’s ownership structure. More exactly, Chinese listed privately controlled firms with a large fraction of politically connected independent directors tend to outperform their non-connected counterparts, due to the ease of access to external debt financing and more subsidies from the government. However, the appointment of politically connected independent directors also enlarges the magnitude of related-party transactions with the controlling party in listed privately controlled firms. In contrast, having politicians as independent directors does not help to add value to listed state-controlled firms, especially firms controlled by the local government, due to the expropriation of minority investors via more related-party transactions and more severe over-investment problems.     

What’s the value of politically connected directors?

This study examines the stock price response to Document 18, a regulation released in China in 2013 requiring independent directors with political connections to resign from the boards of directors for publicly listed firms. We document a significant positive price response in the window surrounding the directive’s promulgation date. This response is also of important economic magnitude. Our findings suggest that on average, the market views the costs of hiring politically connected directors as outweighing the associated benefits. Consistent with this view, we document that politically connected directors often shirk their board duties, as evidenced by their poor rates of attendance at board meetings. Further investigations show that the value decreasing effect of politically connected directors is apparent mainly for firms in regulated industries and varies with earnings management practices. However, the market views politically connected directors favorably if firms have significant business transactions with the government.     

Politically connected boards,value or cost: evidence from a natural experiment in China

This study investigates the net effect of a politically connected board for a firm. Using a natural experiment in China – a regulatory change to forbid bureaucrats from sitting on the board of public firms – we address the causality of the net effect of a politically connected board by testing the market reaction of the shares of firm targeted by the regulatory change to the policy announcement. The stocks of firms with politically connected directors who are targeted by the regulatory change show on average a significantly positive abnormal return, which suggests that the agency cost effect of a politically connected director dominates the value effect. The result is robust to various model settings and to a matched sample using the propensity score methodology. Additionally, the announcement effect of the resignation of a politically connected director is significantly positive, and significantly higher than that of a non‐connected director. Overall, our results suggest that the agency cost effect of a politically connected director dominates the value effect.     

Politically connected boards,family and business group affiliations,and cost of capital: Evidence from Indonesia

We investigate the effect of politically connected boards (both supervisory boards [SBs] and boards of directors [BODs]) on cost of debt and equity capital of listed companies in Indonesia which has established a two-tier corporate governance system. The results, based on 250 firms, suggest that companies with politically connected SBs experience lower cost of debt and equity capital, whereas politically connected BODs have no association with cost of either debt or equity. Furthermore, we find that family firms and firms belonging to business groups with politically connected SBs enjoy lower cost of debt and equity capital. Our main results are robust to alternative measures and to tests for endogeneity.     

Political connections and privatization: Evidence from China

We examine how the political connections of acquirers influence the process and outcomes of privatization in China. We find that politically connected acquirers receive preferential treatment and acquire higher quality firms during full privatization, and document evidence of post-privatization tunneling from target firms to acquirers. We show that the excessive tunneling by politically connected acquirers is associated with lower performance after privatization. Overall, our results suggest that individuals are likely to abuse their political connections to exploit the opportunities arising from privatization. We recommend that policymakers constrain the influence of political connections in the privatization process.