Whether political ties enhance or weaken firm performance has been widely investigated in a number of studies, including some on china. The author examines the relationship between corporate political connections and yields of newly issued corporate bonds. For this purpose the paper first presents a theoretical model and then tests empirically the movement of stock prices during two state elections in india. This study aims to determine the effect of applying good corporate governance and political connections to firm value. A connection to an elected governor increases firm value by 1.
This paper analyzes whether political connections of publicly traded corporations in the united states affect the allocation of government procurement contracts. University of cambridge no 10526, sciences po publications from sciences po. Political connections, financial crisis and firms value. Chan, charles chen, yasheng chen, zhihong chen, agnes cheng, jong. Most of this research suggests that these connections are associated with a wide. Our paper is related to the literature on the value of political connections. The purpose of this paper is to verify existence of political connection of firms in india. Political connections, bailout in financial markets and. Extensive empirical literature examines the relation between managers political connections and firm value.
Most explanations gave at least some role to investor panic, which had led to a massive out. Political connections and firm performance in chinese. While previous studies addressed this question in the contexts of countries with weak legal systems, i attempt to study whether political connections are also important in non corrupted countries with a well functioning strong legal system. Policy uncertainty, political capital, and firm risktaking. Business and politicians interaction is pervasive but has mostly been analyzed with a binary approach, i. Surrounding close gubernatorial elections, local firms with directors connected to winners increase value by 4.
Jul 29, 2014 the purpose of this paper is to verify existence of political connection of firms in india. Such connections serve the twin purposes of hedging and enhancement of the value of collateral pledged against bank loans. Quocanh do, yen teik lee and bang dang nguyen additional contact information bang dang nguyen. Based on a database of nonfinancial ashare listed firms from 2004 to 2012, we study the effects of political ties on firm performance within a quantile regression framework. It contributes to the literature on the link between politics and business, and on the impact of political connections on firm value, by considering industrylevel regulation as a discriminating factor.
Using firmlevel data from six central and eastern european economies, the paper shows that politically connected firms. The purpose of this study is to use a portfoliotimeseries approach to examine the impact of five important political events on the value of politically connected firms in sri lanka. Request pdf political connection and firm value we study the effect of political connection pc on company value in an environment where low pc is due to better institutions and not. The findings are consistent with the different business objectives and motivations of soes and nonsoes in seeking political connections. We distinguish between the political relations that arise from tmts own work experience, which are termed direct political connections dpc, and the relations that tmt develops from working for the same institution with the government officials, which. Abstract this paper examines whether political connections ease financial constraints faced by firms. We investigate whether the aggregated political relations of a firms top management team tmt add value to the firms performance. Second, for the full sample, the overall effect of political connections on firm value is negative, but this negative effect is mainly attributable to the soe subsample. Firms connected to elected governors increase value by 1.
Furthermore, close examination shows an inverted ushaped relation between political connections and firm value for the full sample in general and for nonsoes in particular. Firms connected to elected governors increase value by. While connections to powerful senators significantly increase firm value, connections to newly elected congressmen are less valuable than connections to defeated candidates from state offices. Ang and boyer 2007, the question of whether political connection enhances firm value has mixed findings.
An event study on 19 october 20, the chinese government issued the opinions on further regulation on party and political leaders. We study the effect of political connection pc on company value in an environment where low pc is due to better institutions and not confounded by favorable socialcultural factors. Political connections are more valuable in a state with a higher level of regulation and corruption, in smaller firms, and in firms dependent on external finance. Next we turn to the analysis of the firms tradeoff that determines the degree of political connections. Shanghai social security fund scandal was a major chinese scandal in 2006. This paper investigates whether political connections improve the access of firms to financing. The us federal governments response to the financial crisis was an unprecedented increase in government subsidies, grants, and contracts given directly to specific private businesses. First, do politically connected firms obtain preferential treatment for bank loans. Do electoral promises or friendship connections matter journal of public economics, elsevier, 2014, 115 c. The relationship between political connections and the. Finally, we demonstrate channels through which the benefits of political connections are realized in terms of greater cash holdings, larger long.
Firm size, political connections, and the value relevance of environmental enforcement in china by abdoul g. We show that political connections dampen the negative effect on firm value of related. Essays on political connections and firm value cdr. Politically connected ceos alter corporate employment decisions to help regional politicians in their reelection efforts by having higher job and plant creation rates, and lower rates of destruction in. Director networks value increases with network strength and activities, and is not due to network homophily. Using this classification, the study focuses on the. Implicit political connections, social ties, firm performance, direct political connection, value. Firm size, political connections, and the value relevance of. Second, if these firms do obtain preferential treatment, do they benefit from governmentowned banks gobs more than from. The data is examined by using multiple linear regression to measure the influence of political connections on firm value.
These results support our prediction that political connections add value to chinese firms and that the value effect of political connection is contingent on institutional factors. Estimating the value of political connections by raymond fisman as the indonesian economy went into a downward spiral in the latter half of 1997, there was much speculation and debate as to the reasons behind the sudden decline. We are interested in the relationship between political connections and firms value in chinese listed companies and we attempt to find the possible approaches that would impact political connected firms value. A few earlier papers dealt with related issues, beginning with anne 0. The effect of good corporate governance and political. Renaud coulomb, marc sangnier to cite this version. Political connection is a popular topic in the financial academia. As with many topics n corporate finance, i any study politicaof l connections will have overcome to the. The value of implicit political connections journal of. Chinese evidence abstract we investigate the value of political connections to chinese companies using a sample of companies registered in shanghai during the shanghai social security fund scandal. Political connection and firm value in indonesia pratama. Political connections and the informativeness of insider.
The financial impact of political connections industry. Corporate boards and the value of political connections. The implied value is very high, suggesting that as much as a quarter of a firms share price may be accounted for by political connections. From column 1 in table 1, we see that politically connected firms on average have better returns than nonconnected firms.
Similarly, a recent study of postipo firms shows that political connections may increase firm value even in a country with very low levels of political corruption e. A number of studies examine the influences of firms political activities and connections, such as campaign contributions, lobbying, and politically connected corporate executives and board members, on. Abstract political connection is a popular topic in the financial academia. Yet the network dimensions of such connections are ubiquitous. As for the origin of the political connections, the data show that a firms economic power has little predictive value of its connections to the election committee. Politically connected firms american economic association. Third, there is a nonlinear, humpshaped relation between political connections and firm value for the full sample in general and for the nonsoe subsample in particular. As for the origin of the political connections, the data show that a firm s economic power has little predictive value of its connections to the election committee. Political connection and firm value asian development. Jel d21, g14 while political connections have been widely discussed in the literature on corruption, little work has been done to assess the value of these connections.
Using the data from the sdc global new issue on 6,265 corporate bond issues for the period 20002014, the author finds that bonds offered by politically connected firms average a 36basispoint yield discount over bonds offered by nonconnected firms, holding. Using plantlevel data from france, we document a potential cost of political connections for firms that is not offset by other benefits. Results show that despite numerous news articles and public. They show that value of a firm s intangible capital represented by tobins q market to book ratio bear insignificant relationship to campaign contributions and lobbying expenditure which directly suggests that political connections formed via these routes are temporary and expenditures incurred in this process are often competed away and. Political connections, bailout in financial markets and firm. Evidence from the regression discontinuity design of close gubernatorial elections. Firm value increases initially at a lower level of connections and then begins to decrease at a higher level. Connections are diminished when regulations set more limits on official behavior. Kristian hope, bingbing hu, francis kim, jingjing li, phyllis. As with many topics in corporate finance, studies of political connections have to overcome the endogeneity issue, which prevents the precise identification and quantification of the impact of these connections. This paper investigates the link between stock market liquidity and firm value in an important emerging market, vietnam.
Request pdf political connections, bailout in financial markets and firm value the paper shows that politically motivated interventions in the financial market in the form of bailing out. Thus, wealth effect of bailout from political connection is partially offset by the losses of valuable information brought about by bank lending. It contributes to the literature on the link between politics and business, and on the impact of political connections on firm value, by considering industrylevel regulation as a discriminating factor in the investigation of firm value creation. This book focuses on political connections in the united states.
In particular, many people have analyzed whether or not political connections add value to the firm. The literature on the importance of political connections and on their value implications is relatively small. Kruegers 1974 pio neering work, which focused on rentseeking be havior and efficiency losses resulting from restrictive trade policies. Feeling secured, banks lose incentives to monitor borrowing firms. The terms crony capitalism and cronyism are now widely used to describe the modern relationship between government and private business. The findings of this study revealed that political connections have an effect on firm value as measured by cumulative abnormal return on nonfinancial sector companies listed in indonesia stock exchange. Jan 03, 2018 extensive empirical literature examines the relation between managers political connections and firm value. Additionally, i show that the announcement of a new political connection results in a significant increase in value. On 19 october 20, the chinese government issued the opinions on further regulation on party and political leaders and cadres working parttime holding o. An earlier version of this paper was presented at the 2011 contemporary accounting research conference, generously supported by the canadian institute of chartered accountants. On average, a connection to an elected congressman decreases firm value by 2. Request pdf political connections and firm value in china.
Abstract using the network of university classmates among corporate directors and politicians and the regression discontinuity design of close gubernatorial elections from 1999 to 2010, we identify the positive and significant impact of. To order reprints of this article, please contact david rowe at d. The data of this study are secondary data of manufacturing companies listed on the indonesia stock exchange in 20142016. Specially, we examine this relationship using a sample of firms listed on the ho chi minh city stock exchange for the period 20062014. Overall, our results suggest the importance of investigating a firm s aggregated political connections, especially its ipc. While the value of political connection to firms has received considerable research interest goldman, rocholl, and so 2009. Do electoral promises or friendship connections matter. We show that there is a negative relation between liquidity and firm value.
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