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Political Connections and Preferential Access to Finance: The Role of Campaign Contributions
Abstract
Using novel indicators of political connections constructed from campaign contribution data, we show that Brazilian firms that provided contributions to (elected) federal deputies experienced higher stock returns than firms that did not around the 1998 and 2002 elections. This suggests that contributions help shape policy on a firm-specific basis. Using a firm fixed effects framework to mitigate the risk that unobserved firm characteristics distort the results, we find that contributing firms substantially increased their bank financing relative to a control group after each election, indicating that access to bank finance is an important channel through which political connections operate. We estimate the economic costs of this rent seeking over the two election cycles to be at least 0.2% of gross domestic product per annum.
... In addition, when faced with a crisis, these companies receive additional capital and financial aid from the government. Also, Claessens, Feijen, and Laeven (2008) suggested that having government representatives in a company makes it more likely for creditors to lend to the company in less favourable conditions. This argument was supported by Boubakri, Cosset, and Saffar (2012), who examined the performance of 234 government-connected companies from 1989 to 2003 and concluded that such companies performed better. ...
... Recently, many academic researchers have focused on companies' political ties (Al-Amri et al., 2017;Boubakri et al., 2012;Claessens et al., 2008). According to Jensen and Meckling (1976), the primary source of agency conflict arises when shareholders (principals) designate managers (agents) to run the business while remaining unaware of the managers' actions. ...
... Faccio et al. (2006) found that politically connected companies were more likely to be bailed out during financial difficulties than similar, unconnected firms. Thus, the presence of political ties in a company may aid in connecting to the market, resulting in better financing (Claessens et al., 2008) and lower tax costs (Cheng, 2018). Increased control over opportunistic managers may be attained through political representatives on the BOD (Besley & Burgess, 2001). ...
This study explores the effects of boardroom gender and audit quality on financial earnings smoothing (FES) in the Gulf Cooperation Council (GCC) countries. Additionally, the moderating effects of government representatives as board members on FES are investigated. The study covers six GCC countries: Saudi Arabia, the UAE, Oman, Bahrain, Kuwait, and Qatar. The sample comprises 188 firms from 2013 to 2019. Multiple regression models are used to evaluate the study’s hypotheses. The findings show that the big international and local firms that have both female and male board members, as well as government representatives, on their boards demonstrate effective governance mechanisms. Although they had a negative impact on higher FES, they had a positive impact on lower FES. As for the moderating role, the findings reveal that the role of government members on the board is complementary to the audit quality, particularly in the big four international and local firms. This research may aid businesses in implementing the best governance practices to avoid FES and improve the quality of accounting data, in line with the objectives of the government. However, good practices in moderating earnings smoothing were mainly seen amongst the males.
... Companies develop those links both to mitigate the risk of adverse political decisions and to promote favourable political decisions that can enhance their performance. To reach this purpose, companies may create several types of political connections, for example, can make donations to support political campaigns, offer bribes to influence political decisions, establish a shareholder link with state-owned companies or appoint politicians to their board (e.g., Claessens et al., 2008;Pascual-Fuster & Crespí-Cladera, 2018). This study focuses on a specific type of political connection, that is, the presence of political directors in the boardroom (e.g., Hillman, 2005), and investigates its impact on a firm's performance. ...
... These directors, that is, individuals who have or had various political positions, bring valuable knowledge and connections to the state and the public administration (Hillman, 2005). Their appointment as directors is primarily intended to secure government's support in protecting firm's assets and property rights, obtaining state's subsidies or securing lucrative government contracts (e.g., Claessens et al., 2008;Faccio & Parsley, 2009). ...
... In more detail, political directors may provide expertise on legislative and bureaucratic procedures, connect companies to national governments, facilitate access to information about the public policy process and enhance firm legitimacy (Agrawal & Knoeber, 2001;Goldman et al., 2009). As a result, companies with political directors can enjoy favourable access to financial resources (Claessens et al., 2008;Dinc, 2005;Faccio et al., 2006), lower interest rates (Houston et al., 2014;Infante & Piazza, 2014), reduced tax rates (Faccio, 2010), higher chances of winning government contracts (Goldman et al., 2013) and lower litigation risks (Jia et al., 2019). ...
The existing empirical evidence on the political directors' impact on company performance is mixed and inconclusive, suggesting that this relationship is more complex than initially hypothesised and requires further investigation. This study enhances our knowledge by exploring both political directors' direct effects and the role of moderating contextual variables. Precisely, building on resource dependence and contingency theory, we argue that political directors can positively affect company performance and that this relationship may be moderated by industry regulation and national financial systems. We tested our hypotheses using a longitudinal sample of large European listed companies. Our results highlight that political directors have a detrimental effect on firm performance, while industry regulation and credit‐based financial systems positively moderate this baseline relationship. As such, our findings expand the use of resource dependence theory and provide a more contextual understanding of the impact of political directors on firm performance.
... This phenomenon, often referred to as the "revolving doors," involves government officials seamlessly transitioning between public and private institutions in China (Lu & Wang, 2023). Two types of officials, namely incumbent seniors nearing retirement or retired officials, are particularly motivated to undergo this transformation (Deng & Zeng, 2009;Huang & Chen, 2016). 1 On one hand, these officials leverage their political connections to provide firms or enterprises with increased industrial opportunities or innovation subsidies from the government (Claessens et al., 2008;Faccio, 2006). On the other hand, enterprises are willing to offer high-ranking positions and better salary packages to these officials due to the potential for maximizing their profits or market share through political connections (Deng & Zeng, 2009). 2 Consequently, political connections have become a potential determinant of public resource allocation for enterprises, resulting in preferential treatment in terms of start-up subsidies and new industrial opportunities (Chen et al., 2022;Fakos, 2019;Hsieh & Klenow, 2009). ...
... In fact, this intensity is a very important factor impacting firm innovation since a person in different department rank and personal position do have a very different influence. For example, Claessens et al. (2008) has recognized the importance of intensity of political connections in Brazil, however, their focus is still on the linear impact of political connections on preferential access to finance. This paper measures the intensity of political connections by senior executives' department rank and personal position in the government agencies, and finds that political connections exert an inverted U-shaped impact on innovation. ...
The impact of political experience on corporate innovation has been well studied. However, no
study has speciffcally focused on the impact of political intensity on innovation. This paper addresses
this gap by constructing an index of political connection intensity and examining the
nonlinear effect of political connections on corporate innovation using a dataset of Chinese Ashare
listed ffrms from 2008 to 2017. The results demonstrate that the intensity of political
connections has an inverted U-shaped impact on corporate innovation. Moreover, this relationship
is more pronounced for ffrms located in the eastern or northern regions, state-owned enterprises,
and ffrms in the mature stage. Further analyses indicate that innovation subsidies and
rent-seeking behaviors mediate the inverted U-shaped relationship. Additionally, marketization
negatively moderates this relationship, while the anti-corruption campaign in China positively
moderates it. These ffndings strongly conffrm that different intensities of political connections
have varying impacts on corporate innovation. As a result, this study clariffes the seemingly
contradictory conclusions found in the existing literature.
... Turkiye has a weak institutional environment (SolAbility Sustainable Intelligence, 2021), so it is likely that government-connected firms suffer agency problems, and such firms are more likely to hold more cash. However, government-connected firms are more likely to have easier access to financial resources (Shi et al., 2018), such as loans (Claessens et al., 2008) and a lower cost of equity capital (Boubakri et al., 2012), as ex-bureaucrats on the boards have an important role by providing access to critical resources. In an empirical study, Boubakri et al. (2012) find that governmentconnected firms have a lower cost of equity capital than nonconnected firms. ...
... Government connections signal that a firm has government backing and protection. Claessens et al. (2008) argue that government connections can affect policy formulation, making it firm-specific. Similarly, Correia (2014) shows that firms with government connections are less likely to face SEC (Securities and Exchange Commision) enforcement actions, and, when they do, they receive lower penalties. ...
Relying on the resource dependence theory, this study investigates the effect on intellectual capital efficiency and its components of having board members who are former bureaucrats, using a sample of banks in Turkiye. The study uses a sample of 344 fırm-year observations of banks in Turkiye between 2005 and 2018 to investigate the relationship between ex-bureaucrat board members and intellectual capital efficiency. In addition to ordinary least squares (OLS), the curret study employs instrumental variables with a two-stage least squares model to mitigate potential endogeneity concerns. Our findings show that ex-bureaucrat board members have a significantly positive association with intellectual capital efficiency at banks in Turkiye.
... Politically connected individuals usually aim to maximize their private interests, which can harm the interests of stockholders . For instance, politically connected individuals may provide access to confidential information on government policy and regulations or set up linkages between key public institutions and the business in exchange for financial incentives, including welfare expenditures, donations, campaign contributions, and bribes (Claessens et al., 2008;Hillman & Hitt, 1999). ...
... Boubakri et al., 2012;Goldman et al., 2009;Houston et al., 2014;Maaloul et al., 2018). Previous studies have also reported that political connections offer precious resources to firms in terms of favorable relationship-based contracts and greater access to external finance (Claessens et al., 2008;Houston et al., 2014;Nuswantara et al., 2023;Piotroski & Zhang, 2014) which in turn improve firm performance. Furthermore, according to the resource dependence theory, a firm's competitive advantage lies in obtaining valuable tangible and intangible assets that are difficult or at least excessively costly for competitor firms to obtain. ...
... It is believed that politically connected firms are established to gain incentives in different forms. In a study by Claessens, Feijen, and Laeven (2008) it was found that politically connected firms could access various loans and credits from financial institutions. Similarly, Berkman, Cole, and Fu (2010) found that companies with closer political connections were protected from implementing specific regulations. ...
The study examined the impact of politically connected directors on fraudulent financial reporting for selected listed firms in Nigeria. An ex-post-facto research design data was adopted for the study. A sample size of 80 listed firms from the Nigerian Stock Exchange group was selected from 2014 to 2020. Panel logistic regression was utilised for the study and testing of the hypotheses. The study showed that politically connected directors do not effectively determine the probability that a company would engage in fraudulent financial reporting. However, the study director's overconfidence had a significant positive relationship with fraudulent financial reporting. Director's financial expertise and directors' ownership exhibited an insignificant influence on fraudulent financial reporting. However, the director's compensation revealed a significant negative relationship with fraudulent financial reporting at a p-value of 5% significant level. The study recommended that more politically connected directors should be appointed to the board. It is expected that a higher percentage of politically connected directors will report a significant negative relationship. It also recommends that more directors with financial expertise should be appointed to the board. As this will help to significantly reduce the likelihood of fraudulent financial reporting.
... Another branch of the literature studies the mechanisms through which political connections can benefit firms. Existing work suggests that political connections can help firms secure bailouts (e.g., Brown and Dinc, 2005;Faccio et al., 2006;Duchin and Sosyura, 2012;Behn et al., 2015), enable firms to better access government resources (e.g., Claessens et al., 2008;Goldman et al., 2013), and weaken regulatory enforcement (e.g., Mehta and Zhao, 2020;Tenekedjieva, 2021;Akey et al., 2021;Bourveau et al., 2021;Heitz et al., 2021). Another branch of the literature studies the reasons for and consequences of corruption in government (e.g., Vishny, 1993, 1994;Glaeser and Saks, 2006;Fisman and Miguel, 2007;Smith, 2016;Zeume, 2017;9 These papers show that corporate decisions on governance, mergers and acquisitions, initial public offerings, diversification, and leverage are important for worker outcomes such as employment, income, and career trajectories (e.g., Atanassov and Kim 2009;Simintzi et al. 2015;Tate and Yang 2015;Brown and Matsa 2016;Mueller et al. 2017;Bai et al. 2018;Graham et al. 2019;Babina 2020;Babina et al. 2020;Baghai et al. 2021). ...
... On the other hand, implicit political connections develop through friendships between the company's senior management personnel and political figures (Faccio et al., 2006). In addition, implicit political connections may emerge, among other things, as a result of companies making campaign contributions or donations to political parties at (or near) election time (Cooper et al., 2010;Claessens et al., 2008;Aggarwal et al., 2012). The concrete political connections referred to here include the following relationships: 1) companies whose top executives or major shareholders have been described in the press as having friendships with heads of state, government ministers, or members of parliament; 2) relations with officials who have served as heads of state or prime ministers in the past; 3) companies whose former top executives or large shareholders are involved in politics; 4) relations with foreign politicians; and 5) other connections identified in previous research (Faccio, 2010). ...
... These actions not only facilitate enterprises' identification of new growth opportunities but also aid the government in achieving social goals and enhancing social welfare. They establish political connections between enterprises and the government, enhancing enterprises' resilience to cope with uncertain political environments (Claessens et al. 2007;Chan et al. 2012;Cull et al. 2015). Finally, environmental protection investment can help enterprises utilize resources more effectively, reduce production costs, and minimize waste and pollution, thus enhancing resource utilization efficiency (Xu et al. 2014;Zhang et al. 2020). ...
This paper uses the sample of all A-share listed companies in China’s securities market except insurance and financial enterprises from 2009 to 2021 to construct a long panel data, and explores whether the environmental investment of enterprises will promote their long-term sustainable development in China’s unique and superior institutional and cultural environment from the perspective of Marxist ecological civilization. On the basis of controlling measurement errors, omitted variables, and endogenous problems of mutual causality to ensure the robustness of the research results, and further distinguishing the heterogeneous effects of environmental investment and sustainable development of enterprises in different degrees of market-oriented environment, the empirical study shows that (1) there is a significant positive relationship between environmental investment and sustainable development of enterprises. That is to say, environmental investment can help enterprises obtain social capital, alleviate resource constraints, enhance their market performance, and thus help their sustainable development in the future; (2) environmental protection investment has a significant positive impact on the sustainable development of enterprises in the mature market environment, while in the relatively backward market environment, environmental protection investment has no significant role in promoting the sustainable development of enterprises. This paper enriches the literature on corporate environmental investment, makes a preliminary test of the implementation effect of sustainable development in China, and provides more detailed empirical evidence for the government to further guide the implementation and implementation of corporate environmental responsibility.
... Moreover, the development of China's markets for essential productive factors (such as capital, labor, land) still lags behind, and there is serious allocation distortion among enterprises, various sectors or regions [12]. According to Khwaja et al. [27] and Claessens et al. [28], firms in developing countries often establish political connections with the government in order to engage in rent-seeking behavior. Such ties allow firms to gain access to factor resources allocated by government officials who wield the power to allocate them. ...
... For instance, the red hat strategy (e.g., private entrepreneurs being members of the People's Congress) can create a friendlier business environment and orchestrate governmental support for a firm (Chen, 2007;Dickson, 2007;Li et al., 2008). In turn, political patronage and governmental support can grant firms better access to human resources (e.g., by attracting university graduates and establishing centers for postdoctoral research), to bank loans and markets, to more favorable regulatory policies, and to potential protections from competition (Agrawal & Knoeber, 2001;Claessens et al., 2008;Faccio et al., 2006;Khwaja & Mian, 2005). All of these external sources serve a similar function, such as directly providing access to innovation or to resources for innovation, so they should render internal human capital resources enabled by foreign study experience less necessary or influential. ...
Research has found that entrepreneur foreign-study experience can have either positive significant effects on firm innovation, or nonsignificant effects. The question, then, is when such experience benefits firm innovation, and when it does not. Adopting a resource-substitution perspective, we posit that the difference occurs because certain local resources can play a significant moderating role. Specifically, a private entrepreneur’s foreign-study-enabled human capital becomes less influential in driving firm innovation when the foreign-educated entrepreneurs participate strongly in the political system, or when the firm has a high level of guanxi––each of which enables the firm to achieve a local resource advantage over other firms, without the need for enhanced innovation. In contrast, foreign-study-enabled human capital becomes significantly influential in the context of high local marketization. We used the data from a series of nationwide surveys of privately owned firms in China to test these ideas. Regression results based on negative binomial regression models showed that returnee entrepreneurs’ participation in the political system, and firms’ guanxi, each substituted for the role of the returnee entrepreneurs’ foreign study experience in fostering firm innovation, thus rendering such experience no longer significant for firm innovation in the presence of strong political participation or guanxi. In contrast, entrepreneur foreign-study experience led to advantageous firm innovation in the context of higher local marketization.
... Expecting this behavior, firms may reduce their self-dealing activities. However, firms with political influence are less concerned about their market performance because they receive preferential financing treatment and rely relatively less on the stock market for external financing (e.g., Piotroski and Zhang 2014;Claessens, Feijen, and Laeven 2008). Ã , ÃÃ , ÃÃÃ Indicate statistical significance at the 10 percent, 5 percent, and 1 percent levels, respectively. ...
This paper examines whether and how firms’ engagement in related-party transactions (RPTs) is shaped by public communication of audit risks as required by the expanded audit report. Using the phased regulatory changes in China and a difference-in-differences design with firm fixed effects and matching, we find that firms significantly reduce their RPTs after the adoption of expanded audit reports (EARs). To investigate potential mechanisms, we find that (1) investor scrutiny increases after the adoption of EARs, (2) the reduction of RPTs is more pronounced when EARs are more likely to attract investor attention, and (3) the reduction of RPTs is weaker when firms are less concerned about investor scrutiny. The results suggest that EARs can attract investor scrutiny and increase the possible penalty associated with self-dealing, thus motivating firms to reduce RPTs.
Data Availability: Data are available from the public sources cited in the text.
JEL Classifications: G30; G34; G38; M10; M16; M40; M41; M42: M48.
... A significant association exists between WGIs and Total asset turnover Gupta (2011), Sokolov and Solanko (2017) A significant association exists between WGIs and Dividend payout ratio Mitton (2004), Benavides et al. (2016) and Hofmann (2018) A significant association exists between WGIs and Operating Expenses/Total Assets Mueller andStewart (2011), De Schoenmaker et al. (2014) A significant association exists between WGIs and Long-term debt ratio (2005), Faccio (2006), Claessens et al. (2008), Cull et al. (2015), C. J. Chen et al. (2011Chen et al. ( , 2014, Boubakri et al. (2012Boubakri et al. ( , 2013, Yeh et al. (2013), Yang et al. (2014), Lashitew (2014), and Preuss and Königsgruber (2021) offer evidence on the easiness to borrow a loan from the bank when firms have good political connection, which, therefore, increases the value of firms and improves financial performance (Fisman, 2001;Johnson & Mitton, 2003;Ramalho, 2007;Roberts, 1990). Accordingly, Bliss and Gul (2012), Ebrahim et al. (2014), and L. Wang (2015) report that politically connected large firms are significantly associated with higher leverage. ...
... Bhaumik and Selarka's (2012) study addresses this research gap by investigating the relationship between industry concentration and financial performance among Indian-listed firms across various industries. Previous studies have explored the concentration-performance relationship in different contexts and industries, such as the German manufacturing industry (Schmidt et al., 2007) and European banks (Goddard et al., 2004), yielding mixed or inconclusive results (Motta, 2004;Claessens et al., 2008). ...
This study examines the relationship between industry concentration and financial performance among Indian-listed firms across various industries. Using a sample of over 2,078 firms from 29 distinct sectors, Herfindahl-Hirschman Index for each company and industry was calculated and categorized into high, medium and low-concentration industry categories. To ensure representativeness and data reliability, 1,583 small companies with HHI scores below 0.6 were excluded from the analysis at the stage of comparative analysis after calculating the industry-wise concentration. The remaining 495 firms were classified and compared using the Student and Welch t-test across three industry concentration groups: high versus medium, medium versus low and high versus low.
The findings revealed heterogeneous relationships between industry concentration and financial performance across various ratios. For instance, return on equity (ROE) and return on assets (ROA) demonstrated a positive relationship with concentration levels, whereas liquidity and solvency ratios showed mixed results. Operating performance, dividend and valuation ratios displayed an inconclusive pattern. These results provide valuable insights into the complex concentration-performance nexus and offer valuable theoretical and managerial implications.
This study contributes to the existing literature by addressing research gaps and inconsistencies concerning the concentration-performance relationship in the context of emerging markets. Additionally, the study offers valuable information to policymakers, investors and managers seeking to better understand the impact of industry concentration on firm performance.
... Since the government often plays important roles in allocating resources in a firm's operation through political connections for economic targets (Claessens, et al. 2008;Faccio 2006;Xu et al. 2016;He et al. 2019;Li et al. 2020b;Cui et al. 2021;Huang et al. 2022;Xu et al. 2022b;Wu et al. 2023), we extend our examination to the link between the local economic growth pressure and green loan results. We divide the heavy polluters according to the median regional GDP growth ranking into groups in regions of high and low economic pressures. ...
China has historically
imposed its green loan policy since 2012. We examine the impact of green loan policy on the transformation of heavy polluters and find that green loans are favorable towards their green mergers and acquisitions (M&As). Our results also suggest that green loans provide better incentives to heavy polluters in regions of lower pollution, with lower asset specificity, or with fewer financing constraints. Our additional test suggests that the green loan policy may be meaningful for privately owned heavy polluters. Good bank-firm relationships or less GDP pressure on local government may further strengthen such incentives. This study may contribute to the discussion on green loans and the transformation of heavy polluters with policy implications for emerging markets.
We study investors’ preferences for corporate political connections in the United States using a novel measure: shareholder votes given to individual directors. We find that, after fully accounting for all firm‐year specific information and a wide range of director characteristics, politically connected directors on average do not obtain significantly greater shareholder support. During our sample period (2010–2020), we observe a diminishing popularity of politically connected directors. Political alignment to the incumbent government matters in the sense that Democrat directors are viewed as valuable to shareholders during the Obama administration. However, during Donald Trump's presidency, a Democrat party affiliation instead turned into a liability. We also find that shareholders have a stronger preference for politically connected directors in heavily regulated industries, suggesting that board members can alleviate regulatory risk. Our study has implications for director selection and the role of political connections in shaping corporate governance practices.
Using a comprehensive data set of housing transactions in Beijing, China, we find that government officials are more likely than non‐officials to buy housing units before the government‐imposed housing purchase restriction policy. We also find that officials use their power to speed up the loan application process and pay higher prices to complete the transactions before the policy. Overall, the results suggest that officials trade on private information gained during the policymaking process.
Purpose
While the relationship between non-family CEOs and corporate innovation in China has been widely studied, the results remain inconclusive. This study explores the relationship between non-family CEOs and corporate innovation in the context of intergenerational succession. It considers the background and background characteristics of non-family CEOs in an attempt to provide a theoretical foundation for human resource management and innovative strategic management that can be applied in the transformation of family companies.
Design/methodology/approach
The authors develop, then test, a series of hypotheses using an econometric analysis of a large sample of Chinese listed family firms. To control for endogeneity problems, such as missing variables in the model and the selectivity bias of the sample, propensity score matching (PSM) model is applied to analyze the panel data of 452 listed family firms from 2009–2019.
Findings
This study first validates the mechanism by which non-family CEO background characteristics affect innovation performance in family firms. It then reveals the varying moderating effects of two stages of intergenerational succession (i.e. later-generation participation in management and later-generation take-over management) that influence the relationship between non-family CEOs and corporate innovation.
Originality/value
The study's findings based on upper echelon and imprinting theory complement and extend existing research by revealing the impact of non-family CEOs from different backgrounds, and also identifying the role of intergenerational succession in the relationship between non-family CEO background characteristics and innovation performance.
Using a manually collected data set of Chinese publicly traded firms from 2010 to 2017, this study examines how public–private partnerships (PPP) affect the cost of debt and financial reporting. We argue that a firm gains political capital through a PPP and thus may access debt markets at a lower cost. Consistent with our expectation, we find that participants of PPP enjoy significantly lower bank loan interest rates than other firms. This is more pronounced for nonstate‐owned enterprises, for firms without politically connected CEOs, and for loans from state‐owned banks. However, these participants reduce their accounting conservatism, suggesting a substitution between financial reporting and political connections. Also, participating in PPP does not improve firms' financial performance. Thus, the lower interest rates are not justified by economic fundamentals or financial reporting quality. Overall, our study suggests that PPP distort state‐owned banks' lending decisions and lower accounting conservatism, highlighting the potential cost of PPP to society.
Financing is critical for the development of any economy. Countries in both the developed and developing world require large-scale counter-cyclical financing to drive economic activity and particularly to contribute to sustainable growth and create employment. One of the main mechanisms that has been used by governments and the international community to support this process and achieve growth and development outcomes is development banks.
This study investigates the effect of decentralisation of SOEs on stock price crash risk. In so doing, we test two competing hypotheses. Under the Political Influence Hypothesis , decentralisation aggravates local government's expropriation of minority shareholders (type II agency conflict), and thus increases crash risk. Under the Local Information Hypothesis , decentralisation decreases monitoring distance (type I agency conflict), strengthens external monitoring and thus decreases crash risk. We find robust evidence supporting the Political Influence Hypothesis . Cross‐sectional analyses show that our baseline results are more pronounced when firms are decentralised to the provincial level and politicians have greater incentives to pursue their political objectives. We further show that bad news hoarding and risk‐taking are two potential channels through which SOE decentralisation increases crash risk. Taken together, our results imply that the decentralisation exacerbates the type II agency conflict rather than ameliorates the type I agency conflict in SOEs.
This paper explores whether a military connected board is an effective corporate governance mechanism, leading to sustainable corporate policies and outcomes. Appointing military‐experienced directors could be a firm's good and ethical business strategy if it positively influences firms' decision making process and eventually outcomes. Relying on over 6800 firm‐year observations over the period of 2000–2018 in the Thai stock market, we find military connected boards mis‐utilize firms' resources, representing a weakening governance mechanism―in line with agency cost theory. Specifically, firms with military officials on their boards are highly levered, keep low cash reserves, pay low dividends, but underinvest, and historically underperformed. However, we find a positive relationship between military connected boards and firm value, measured by Tobin's Q, representing potential future growth and supporting resource dependency hypothesis. Although backward‐looking analyses point toward irresponsible and unsustainable corporate policies which ultimately destroy corporate outcomes, forward‐looking evidence sees a good use of military connected board members in bidding on the government's projects.
Purpose
This study examines the effect of business group affiliations on corporate cash holdings and how political connectedness modifies the relationship between business group affiliations and corporate cash holdings.
Design/methodology/approach
The multiple ordinary least square regression with year dummies is used to estimate the effect of business groups on cash holdings. For moderating, the multiplicative term is used. The data from 252 non-financial firms listed on Pakistan Stock Exchange were collected for the analysis from 2010 to 2018.
Findings
The findings show that business group affiliations negatively affect corporate cash holdings, and political connection positively moderates this relationship. Business group firms that are politically connected hold less cash. The firm-specific factors such as leverage, size, cash flow, and dividend dummy also significantly affect corporate cash holdings.
Practical implications
The results imply that affiliated companies have lessened financing frictions and improved stability in their expected future cash flows. Moreover, the results indicate that political connection minimizes the opportunity and agency costs linked to cash holdings.
Originality/value
This study contributes to the existing literature by examining the moderating role of political affiliations on the relationship between business groups and cash holdings in the emerging market.
Purpose
This study aims to examine how business executives' political connections are associated with government subsidies and strategic change, and how they, in turn, influence firm performance, measured by return on assets (ROA) and market share.
Design/methodology/approach
Hypotheses were tested using the large firm-level dataset provided by the National Bureau of Statistics (NBS) of China for the period 2003–2013. This is one of the most comprehensive datasets of Chinese manufacturing companies and includes 321,722 firms on average per year, which spans over 37 industries.
Findings
The authors found that political connections, measured by senior executives' membership in the National People's Congress of China (NPC), were positively associated with government subsidies but were not associated with strategic change. Also, government subsidies, as the underlying mechanism, mediated the relationships between NPC membership and firm performance but strategic change did not.
Research limitations/implications
By examining the possible mediators between corporate political strategies and firm performance, the authors confirmed the thought that the impact of political connections on firm performance is a complex phenomenon and goes beyond a simple direct effect. However, future research could explore other mediators in this relationship.
Originality/value
While the direct relationship between political connections and firm performance has been examined in management literature, the results are mixed. For the first time, the authors addressed the gap and opened the “black box” – the underlying mechanisms of this relationship. This study's findings contribute to the literature on corporate political activity, strategic change, and their influences on firm performance.
This article examines whether political connections and CSR activities influence firm value in an emerging market. We use panel data of 1,897 firms listed on the National stock exchange (NSE) for 2015–2020 with 11,382 firm-year observations. Around 20% of sample firms in the study are politically connected, with 12% connected through the donation channel and 18% connected through the promoter or firm owner channel. The results show that politically connected firms are actively involved in CSR through spending on various activities. We find that politically connected firms perform better, and investment in CSR activities has a moderating effect on firm value. Our result is consistent when examined using firm-level ESG (Environmental, Social and Governance) data and after controlling for various factors.
We examine stock market reactions to public company visits and the public comments made therein by five presidents (George H. W. Bush through Donald J. Trump) over three decades (from 1989 to 2019). We find striking evidence that investors value these visits during periods of unified government or when the president announces favorable policy. However, a president's praise during the visit and his popularity at the time of the visit do not appear to have an impact on investors’ reactions. Our findings suggest that investors value affiliation with the president only when they perceive opportunities to obtain substantive policy benefits.
Research Question/Issue
Does geopolitical risk increase a firm's risk‐taking, and will diversification expansion smooth out or exacerbate this effect?
Research Findings/Insights
Based on microdata of Chinese A‐share listed companies, we find that (1) geopolitical risk significantly increases corporate risk‐taking at both micro and macro levels; (2) horizontal diversification can significantly smooth out the impact of geopolitical risk on a firm's risk‐taking, while vertical diversification will exacerbate the effect; (3) geopolitical risk and diversification do not significantly impact all firms, and their effect are limited to non‐state‐owned enterprises and firms in manufacturing industries.
Theoretical/Academic Implications
First, compared with the previous studies, this paper identifies the geopolitical risk faced by each sample firm separately, thus providing a more accurate analysis of the impact of the specific geopolitical risk faced by the firm on its risk‐taking. Second, we expand the connotation of diversification and analyze its moderating effect on corporate risk‐taking from the perspective of horizontal and vertical diversification. Third, considering that the degree of political affiliation and capital intensity may affect a firm's sensitivity to geopolitical risk, this paper examines the relationship between geopolitical risk, diversification, and a firm's risk‐taking regarding property rights and industry type.
Practitioner/Policy Implications
On the one hand, export‐oriented firms should pay close attention to the geopolitical risk situation in exporting countries to reduce the adverse impact of sudden geopolitical risks. On the other hand, diversification expansion is a double‐edged sword for firms. Although vertical diversification increases the risk‐taking of a firm, it also increases its specialization. Therefore, it is necessary to make a comprehensive judgment on whether and what kind of diversification an enterprise should undertake according to its business development status.
Research Summary
Does corporate political activity (CPA) help sustain performance? Prior literature did not address this question, only whether CPA increases profits—with mixed results over short timescales. We theorize about how political capital affects the regression‐to‐the‐mean of profits through firm and industry persistence mechanisms. Using data on over 6000 firms from 14 democratic countries, we estimate time‐varying, firm‐specific performance persistence coefficients with random‐coefficient models—and profit volatility measures. Triangulating identification methods suggests that the half‐life of political capital is shorter than expected, also compared with other strategy interventions. Political connections are marginally effective at sustaining performance and reducing volatility, delaying profit convergence by only 0.180 years—and with no effect beyond 7 years. Preliminary evidence shows that legislative constraints further curb these modest benefits of CPA.
Managerial Summary
Corporate political activity (CPA) has an ambiguous impact on firm profits. Yet, it still is a prominent and recurrent firm strategy. Do firms use CPA to sustain existing performance advantages—rather than to create new ones? We show that one type of CPA—the co‐optation of politicians into company boards—does increase the persistence and lowers the volatility of firm performance. However, this effect is surprisingly small: advantages only last 2.4% longer, 7.44 years compared to 7.26 years for politically unconnected firms. Political capital erodes faster than expected, presumably due to political cycles or politically motivated firm strategies that are detrimental to performance. CPA seems less effective at sustaining performance advantages than firm investments in R&D or skilled labor—and has a limited anticompetitive effect.
Agency theory has shown that multiple large shareholders have competing monitoring and entrenchment governance effects. Therefore, this paper studies the governance effects of multiple large shareholders to determine the dominant effect in the Chinese setting. A panel data model and F‐ test demonstrate that a significant positive relationship exists between multiple large shareholders and firm performance, but the positive relationship between multiple large shareholders and firm performance will be weakened by state‐owned enterprises and politically connected enterprises. Furthermore, our findings suggest that multiple large shareholders can enhance firm performance by mitigating the agent–principal problem and the principal–principal problem. Additionally, a threshold model is introduced to explore the impact of other governance mechanisms on multiple large shareholders' governance, and our findings show that enhancing controlling shareholder governance and board size significantly weakens multiple large shareholders governance, but increasing the proportion of independent directors strengthens the positive relationship between multiple large shareholders and Tobin's Q and weakens the positive relationship between multiple large shareholders and ROA .
The financial crisis that began in 2008 and its lingering aftermath have caused many intellectuals and politicians to question the virtues of capitalist systems. This book analyzes both the strengths and weaknesses of capitalist systems. The volume opens with articles on the historical and legal origins of capitalism. These are followed by articles describing the nature, institutions, and advantages of capitalism: entrepreneurship, innovation, property rights, contracts, capital markets, and the modern corporation. The next set of articles discusses the problems that can arise in capitalist systems including monopoly, principal agent problems, financial bubbles, excessive managerial compensation, and empire building through wealth-destroying mergers. Two subsequent articles examine in detail the properties of the “Asian model” of capitalism as exemplified by Japan and South Korea, and capitalist systems where ownership and control are largely separated as in the United States and United Kingdom. The volume concludes with an article on capitalism in the twenty-first century by Nobel Prize winner Edmund Phelps.
Purpose
This study aims to investigate the relationship between political connections and the over-indebtedness of firms in the construction industry. Furthermore, this study explores the moderating effect of corporate governance mechanisms with monitoring intent on this relationship.
Design/methodology/approach
This study uses the data from China’s listed construction firms for the years 2010–2019 to run the fixed-effect regression. This study constructs the optimal capital structure mathematical model by following the trade-off approach.
Findings
The research results show that most of China’s listed construction firms are surprisingly over-indebted in the long run. This study affirms that political connections positively impact the over-indebtedness of China’s listed construction firms. However, corporate governance can alleviate the impact of political connections on the over-indebtedness of China’s listed construction firms.
Originality/value
There were limited studies to discuss the relationship between political connections and the over-indebtedness of construction firms, and no particular attention has been given to the moderating effect of corporate governance mechanisms on the relationship between political connections and over-indebtedness. Moreover, in calculating the over-indebtedness of China’s listed construction firms, this study considers the financial characteristics of China’s construction firms when building the mathematical model of optimal capital structure, which makes the calculation results of over-indebtedness closer to reality.
Economic policy determines the intensity of competition in markets. This gives incumbents the incentive to use their financial resources to influence policymaking in order to restrict competition and maintain or increase economic profits. Public authorities should promote the use of profits rather in welfare-enhancing or neutral ways. Is competition law an adequate tool to promote this goal? This paper aims to ground the discussion on legal administrability considerations. The focus is therefore on whether we can design legal standards and identify evidence that courts can use to assess the tradeoffs between static efficiency, political influence of large corporations, and innovation. This paper argues that if political considerations are to be taken into account in antitrust analysis, these should be made explicit and the evidence at hand in each case should be considered, in order to avoid enforcement guided by assumptions—such as that increases in market concentration always lead to risks in terms of political influence—that can otherwise be revised on a case-by-case basis.
Previous studies have clearly documented the shareholder advantages and disadvantages of political connections. However, evidence of the role of political connections in ethical investment is scarce. This study investigates the relationship between political connections and the reconstructions of the Sharia index in Indonesia. Using the event study methodology, I evaluate the abnormal returns surrounding the announcement of the inclusion or exclusion of firms in or from the Indonesia Sharia Stock Index (ISSI). I further conducted a regression analysis to enhance the identification of the relationship between political connections and Sharia compliance. Neither the inclusion nor exclusion of firms in or from the ISSI yields abnormal returns, indicating that investors are not very concerned about ISSI reconstitutions. Political connections increase firm value before their inclusion in the ISSI. However, the benefits of such connections are lost after their inclusion in the ISSI. Meanwhile, I find no evidence of a relationship between political connections and the market reaction surrounding the exclusion of firms from the ISSI.
We examine how firms interact with government officials within a corruption environment. Using corruption convictions to measure the extent of political corruption at the province level and a sample of Chinese listed firms, we find that firms located in more corrupt provinces invest more in building connections than firms located in less corrupt provinces. These results are robust to the instrumental variable approach, adjacent province matching, propensity score matching and alternative measurement of political corruption. We also show that the effect of political corruption is more pronounced in non‐state‐owned enterprises (non‐SOEs), smaller firms, firms with financial constraints and firms without political connections. Additionally, we find that those firms that invest more on connection building are less likely to restate financial reports and have lower financial statement comparability. Overall, the evidence from China is consistent with the political connection view that firms respond to political corruption by investing in relationship building, which contrasts with the evidence from the US.
Purpose
The objective of this paper is to study the impact of political connection and governance on credit rating and whether there is a substitution or complementary relationship between them.
Design/methodology/approach
In order to achieve the objective, a succession of eight ordered probit regressions has been carried out. Moderating variables between the political connection and governance characteristics were introduced. The whole population is taken as a sample, i.e., 27 Tunisian companies that are evaluated by FITSH NORTH AFRICA agencies over a period of 10 years (2009–2018).
Findings
The outcomes are mixed. They show that the political connection does not always influence credit rating; the size and board independence always improves credit rating; the duality between the functions affects credit rating; whereas the majorities’ proportion does not influence credit rating; and a substitution between the political connection and the governance characteristics is validated.
Research limitations/implications
Like any other research, our results are factors of our measures and variable choice and depends heavily on the how these variables were conceived. Also, although our number of observations responds to the statistical result generalization requirements, our sample remains relatively narrow with 27 companies only.
Practical implications
In practice, the research will allow investors to have a better vision upon the future of their investments based on whether to develop their governance system or promote political networking. It will also prompt lenders to look beyond ratings and consider factors such as political connections to make a rational judgment on their future placements.
Social implications
This study leads us to find various solutions: the establishment of credit agencies that take into consideration all the data of all the operators taken as a whole (bank, leasing company, and factoring). It encourages the reorganization of the Tunisian banking sector through mergers for example.
Originality/value
This study is a pioneer in the credit rating field in Tunisia, where the source of debt financing is the most used by all enterprises across all sectors. This study extends the literature of political connection effectiveness, independent directors, board size, in improving corporate performance and credit rating.
Government ownership of banks is very common in countries other than the United States. This paper provides cross-country, bank-level empirical evidence about political influences on these banks. It shows that government-owned banks increase their lending in election years relative to private banks. This effect is robust to controlling for country-specific macroeconomic and institutional factors as well as bank-specific factors. The increase in lending is about 11% of a government-owned bank's total loan portfolio or about 0.5% of the median country's GDP per election per government-owned bank.
We used a detailed data set on Thai firms before the Asian crisis of 1997 to examine whether business connections predicted preferential access to long-term bank credit. We found that firms with connections to banks and politicians had greater access to long-term debt than firms without such ties. Connected firms needed less collateral, obtained more long-term loans, and appeared to use fewer short-term loans than those without connections. We found no connections between banks and firms reducing asymmetric information problems. This is consistent with research implicating weak corporate governance in the extent and severity of the crisis.
This paper examines the value of connections between German industry and the Nazi movement in early 1933. Drawing on previously
unused contemporary sources about management and supervisory board composition and stock returns, we find that one out of
seven firms, and a large proportion of the biggest companies, had substantive links with the National Socialist German Workers'
Party. Firms supporting the Nazi movement experienced unusually high returns, outperforming unconnected ones by 5% to 8% between
January and March 1933. These results are not driven by sectoral composition and are robust to alternative estimators and
definitions of affiliation.
In many countries, banks lend to firms controlled by the bank's owners. We examine the benefits of related lending using a newly assembled data set for Mexico. Related lending is prevalent (20 percent of commercial loans) and takes place on better terms than arm's-length lending (annual interest rates are 4 percentage points lower). Related loans are 33 percent more likely to default and, when they do, have lower recovery rates (30 percent less) than unrelated ones. The evidence for Mexico in the 1990s supports the view that in some important settings related lending is a manifestation of looting. © 2001 the President and Fellows of Harvard College and the Massachusetts Institute of Technology
We study the competition between two political parties for seats in a legislature. The parties have fixed positions on some
issues, but vary their positions on others in order to attract votes and campaign contributions. In this context, we examine
whether special interest groups are governed by an electoral motive or an influence in their campaign giving, and how their contributions affect the equilibrium platforms. We show that each party is induced
to behave as if it were maximizing a weighted sum of the aggregate welfares of informed voters and members of special interest
groups. The party that is expected to win a majority of seats caters more to the special interests.
In this paper, we investigate a neglected aspect of financial systems of many countries around the world; government ownership of banks. We assemble data which establish four findings. First, government ownership of banks is large and pervasive around the world. Second, such ownership is particularly significant in countries with low levels of per capita income, underdeveloped financial systems, interventionist and inefficient governments, and poor protection of property rights. Third, government ownership of banks is associated with slower subsequent financial development. Finally, government ownership of banks is associated with lower subsequent growth of per capita income, and in particular with lower growth of productivity rather than slower factor accumulation. This evidence is inconsistent with the optimistic "development" theories of government ownership of banks common in the 1960s, but supports the more recent "political" theories of the effects of government ownership of firms.
We develop a positive theory of how interest-group competition shapes the organization of Congress and use it to explain campaign contribution patterns in financial services. Since interest groups cannot enforce fee-for-service contracts with legislators, legislators have an incentive to create specialized, standing committees which foster repeated dealing between interests and committee members. The resulting reputational equilibrium supports high contributions and high legislative effort for the interests. Contribution patterns by competing interests in the congressional battle over whether banks can enter new businesses support the theory, which also has implications for term limits and campaign reform. (JEL D72, D78, G28).
Many firms voluntarily incur the costs of attempting to influence politicians. However, estimates of the value of political connections have been made in only a few cases. We propose a new approach to valuing political ties that builds on these previous studies. We consider connected to a politician all companies headquartered in the politician's hometown, and use an event study approach to value these ties at their unexpected termination. Analysis of a large number of sudden deaths from around the world since 1973, yields a 2% decline in market value of connected companies. Our stronger results are likely due to the lack of a clear event in earlier studies, and lead us to conclude that previous estimates understate the value of political ties.
Outside the United States and the United Kingdom, large corporations usually have controlling owners, who are usually very wealthy families. Pyramidal control structures, cross shareholding, and super-voting rights let such families control corporations without making a commensurate capital investment. In many countries, a few such families end up controlling considerable proportions of their countries' economies. Three points emerge. First, at the firm level, these ownership structures, because they vest dominant control rights with families who often have little real capital invested, permit a range of agency problems and hence resource misallocation. If a few families control large swaths of an economy, such corporate governance problems can attain macroeconomic importance--affecting rates of innovation, economywide resource allocation, and economic growth. If political influence depends on what one controls, rather than what one owns, the controlling owners of pyramids have greatly amplified political influence relative to their actual wealth. This influence can distort public policy regarding property rights protection, capital markets, and other institutions. We denote this phenomenon economic entrenchment, and posit a relationship between the distribution of corporate control and institutional development that generates and preserves economic entrenchment as one possible equilibrium. The literature suggests key determinants of economic entrenchment, but has many gaps where further work exploring the political economy importance of the distribution of corporate control is needed.
We study the competition between two political parties for seats in a legislature. The parties have fixed positions on some issues, but vary their positions on others in order to attract votes and campaign contributions. In this context, we examine whether special interest groups are governed by an electoral motive or an influence in their campaign giving, and how their contributions affect the equilibrium platforms. We show that each party is induced to behave as if it were maximizing a weighted sum of the aggregate welfares of informed voters and members of special interest groups. The party that is expected to win a majority of seats caters more to the special interests. Copyright 1996 by The Review of Economic Studies Limited.
Political scientists typically assume that money strongly influences elections. More recently, it has been argued that money does not influence elections in newer democracies. Because newer democracies possess poorly institutionalized political markets with a relative lack of credible commitments between political actors, potential donors are reluctant to provide money to candidates in exchange for expected government services. However, campaign funds can play a critical role in elections in newer democracies. The same elements that support credible commitments in established democracies—reputation, iteration, and the possibility of punishment—can also support a political market for campaign finance in newer democracies. Evidence from Brazil supports this argument.
Although PACs attempt to influence the legislative process with contributions, this research finds little evidence that the contributions of 120 PACs affiliated with 10 organizations affected the voting patterns of the House members who served continuously from 1975 to 1982. In the few cases in which a relationship between contributions and a member's votes is established, the analysis indicates that contributions are a surrogate measure of a more important and larger package of support for the member from the interest groups. Two-stage least squares regression models are used to test the relationship between PAC contributions and a member's votes, controlling for the incumbent's ideology and party, and the political leaning of the district. Interviews with PAC officials supplement the statistical analysis.
I investigate the relation between campaign contributions and equity returns during the highly uncertain Florida recount period of the 2000 presidential elections. I find a positive (negative) relation between the level of contributions to Bush (Gore) and equity returns during this period. Similar evidence exists for the partisanship of contributions, an important aspect of contributions not investigated in prior studies. I also examine both firm- and industry-level contributions jointly, which mitigates the correlated omitted variables problem of prior studies. More importantly, this specification helps shed light on the ongoing debate of whether contributions are "influence-motivated" versus "election-motivated". I find that an individual firm's contributions have an impact on its stock returns incremental to that of its industry's contributions. This evidence is more consistent with influence-motivated contributions. Lastly, my results are robust to several other event windows, including a window that excludes the potentially confounding House and Senate races.
Evidence from firms in 47 countries shows that companies connected with officials have higher leverage and higher market shares, but they underperform nonconnected companies on an accounting basis. Differences between connected and unconnected firms become particularly pronounced when political links are stronger, and when connected firms operate in countries with higher levels of corruption.
A number of recent papers have documented that the political elite may use its power to bestow favors onto connected private rms. In this paper, we investigate the reverse perspective: we ask whether the connected business elite alter its corporate decisions to bestow \ re-election favors onto incumbent politicians. We study this question in the context of France, where we document that there is a tight overlap in educational and professional background between the CEOs of publicly-traded rms and politicians: more than half of the assets traded on the French stock markets are managed by CEOS who were formally civil servants, many of them holding government posts. Overall, our results provide support for the hypothesis that connections between CEOs and politicians factor into corporate decisions relating to job creation and destruction. We nd that rms managed by connected CEOs create more jobs (open more plans, destroy less plants) in politically more contested areas, and that this is especially so around election years. We nd only weak evidence that these politicans-rms networks follow partisan lines. The most robust evidence, if any, appears to be coming from the left of the political spectrum, with left-wing CEOs appearing to react more to the needs of left-wing political incumbents. Lastly, we explore whether the \economic favors" extended by connected CEOs to politicians are in some way reciprocated. We nd evidence consistent with such reciprocation through privileged access to subsidy programs.
Empirical studies of distributive politics fail to offer any systematic evidence of a relationship between committee seniority in Congress and the geographic distribution of federal benefits. These findings are at odds with many descriptive accounts of the seniority norm for which such a relationship is a presupposition. Evidence and intuition appear at odds with each other. This study offers a partial reconciliation. The death of Senator Henry "Scoop" Jackson provides the somewhat macabre backdrop to a novel empirical examination of the seniority/benefit relationship. Evidence is provided through stock market reactions to Jackson's death across various constituent interests of Henry Jackson and Sam Nunn, Jackson's successor as ranking minority member on the Senate Armed Services Committee. The results support the hypothesis that a seniority/benefit relationship exists.
Although observers of Brazilian politics commonly hold that voters reward incumbents for “bringing home the bacon,” I provide reasons to question the direct link between pork and electoral success as well as statistical evidence demonstrating the lack of such a link. This generates a puzzle: if pork barreling is ineffective, why do Brazilian deputies spend so much time seeking pork? The answer is that deputies do not trade pork for votes, they trade pork for money: pork-barrel success helps incumbents raise funds from private sector interests that profit from government contracts. In turn, politicians' access to money, not pork, directly affects their electoral prospects. This article provides a new understanding of the electoral connection in Brazil by showing that existing analyses either have overestimated pork's impact or are underdetermined because they have not included measures of campaign finance. The findings should also encourage comparativists interested in pork-barrel politics, clientelism, the personal vote, and campaign behavior more generally to focus attention on the role of money in elections.
Despite general agreement that corruption imposes substantial economic costs, there is little evidence on the success of anti-corruption campaigns. I exploit the 1992 presi-dential impeachment in Brazil to evaluate the impact of an anti-corruption drive on politically connected companies. Using an event study procedure, I establish that family-connected firms have on average significantly negative daily abnormal returns of 2 to 9 percentage points on dates when information damaging to the impeached pres-ident is released. Finally, even though the stock prices of family-connected firms fell initially, this decline was reversed entirely within a year of the episode. I conclude that the impeachment had limited success in reducing corruption.
The onset of the Asian financial crisis in Malaysia reduced the expected value of government subsidies to politically connected firms, accounting for roughly 9% of the estimated $60 billion loss in their market value from July 1997 to August 1998. Firing the Deputy Prime Minister and imposing capital controls in September 1998 primarily benefited firms with strong ties to Prime Minister Mahathir, accounting for roughly 32% of these firms’ estimated $5 billion gain in market value during September 1998. The evidence suggests Malaysian capital controls provided a screen behind which favored firms could be supported.
The state of development of the financial sector does not change monotonically over time. In particular, by most measures, countries were more financially developed in 1913 than in 1980 and only recently have they surpassed their 1913 levels. To explain these changes, we propose an interest group theory of financial development where incumbents oppose financial development because it breeds competition. The theory predicts that incumbents’ opposition will be weaker when an economy allows both cross-border trade and capital flows. This theory can go some way in accounting for the cross-country differences in, and the time-series variation of, financial development.
This paper presents a parameter covariance matrix estimator which is consistent even when the disturbances of a linear regression model are heteroskedastic. This estimator does not depend on a formal model of the structure of the heteroskedasticity. By comparing the elements of the new estimator to those of the usual covariance estimator, one obtains a direct test for heteroskedasticity, since in the absence of heteroskedasticity, the two estimators will be approximately equal, but will generally diverge otherwise. The test has an appealing least squares interpretation.
This paper treats the market for special-interest campaign contributions and political "favors" as a simple asset market. The model yields a simple equilibrium relationship among three variables: the total amount of investor contributions a candidate receives, the monetary value of the favors he has promised, and his probability of winning. Using data on open-seat races for the U.S. House of Representatives, the author confronts the model with a series of tests. Despite the starkness of the model, the results of these tests are highly supportive. Copyright 1990 by University of Chicago Press.
In May 2001, Senator James Jeffords left the Republican Party and tipped control of the U.S. Senate to the Democrats. This paper uses the surprise event to demonstrate what I term the "Jeffords effect": changes in the political landscape have large effects on the market value of firms. I use a firm's soft-money donations to the national parties as the measure of how the firm aligns itself politically. In this event study, a firm lost .8 percent of market capitalization the week of Jeffords's switch for every $250,000 it gave to the Republicans in the previous election cycle. On the basis of the point estimates, the stock price gain associated with Democratic donations is smaller than the loss associated with Republican donations, but the estimates are consistent with the effects being equal and opposite. The results withstand several robustness checks, and the effects appear to persist over time.
Theoretical and empirical studies do not address whether campaign contributions from more than one election cycle are important for congressional voting behavior. Further, they do not address whether campaign contributions from different periods have different effects on legislative voting behavior. This paper analyzes the cumulative effect of campaign contributions over two time periods. Moreover, this paper studies the importance of the timing of contributions for legislative voting behavior. Ten roll call votes on price supports and quotas for various farm commodities in 1981 and 1985 are analyzed. Most of the estimated contribution coefficients are statistically significant. The results show that without campaign contributions farm interest would have lost in five of the seven votes that were won. Moreover, contributions that were given at approximately the same time as the vote have a larger impact on voting behavior than contributions that the legislator received one or two years prior to the vote. Copyright 1995 by MIT Press.
Corruption by the politically connected is often blamed for economic ills, particularly in less developed economies. Using a loan-level data set of more than 90,000 firms that represents the universe of corporate lending in Pakistan between 1996 and 2002, we investigate rents to politically connected firms in banking. Classifying a firm as "political" if its director participates in an election, we examine the extent, nature, and economic costs of political rent provision. We find that political firms borrow 45 percent more and have 50 percent higher default rates. Such preferential treatment occurs exclusively in government banks-private banks provide no political favors. Using firm fixed effects and exploiting variation for the same firm across lenders or over time allows for cleaner identification of the political preference result. We also find that political rents increase with the strength of the firm's politician and whether he or his party is in power, and fall with the degree of electoral participation in his constituency. We provide direct evidence against alternative explanations such as socially motivated lending by government banks to politicians. The economy-wide costs of the rents identified are estimated to be 0.3 to 1.9 percent of GDP every year. Copyright (c) 2005 Massachusetts Institute of Technology.
We present a model of bargaining between politicians and managers that explains many stylized facts about the behavior of
state firms, their commercialization, and privatization. Subsidies to public enterprises and bribes from managers to politicians
emerge naturally in the model. We use the model and several extensions to understand why commercialization and privatization
might work, and what forces contribute to effective restructuring of public enterprises. We illustrate the model using examples
from several countries.
This paper integrates theories of political budget cycles with theories of tactical electoral redistribution to test for political capture in a novel way. Studying banks in India, I find that government-owned bank lending tracks the electoral cycle, with agricultural credit increasing by 5-10 percentage points in an election year. There is significant cross-sectional targeting, with large increases in districts in which the election is particularly close. This targeting does not occur in nonelection years or in private bank lending. I show capture is costly: elections affect loan repayment, and election-year credit booms do not measurably affect agricultural output. (JEL D72, O13, O17, Q14, Q18)
This paper develops a model where this is a trade-off between the enforcement of the property rights of different groups. An oligarchic' society, where political power is in the hands of major producers, protects their property rights, but also tends to erect significant entry barriers, violating the property rights of future producers. Democracy, where political power is more widely diffuesed, imposes redistributive taxes on the producers, but tends to avoid entry barriers. When taxes in democracy are high and the distortions caused by entry barriers are low, an oligarchic society achieves greater efficiency. Nevertheless, because comparative advantage in entreprenuership shifts away from the incumbents, the inefficiency created by entry barriers in oligarchy deteriorates over time. The typical pattern is therefore one of the rise and decline of oligarchic societies: of two otherwise identical societies, the one with an oligarchic organization will first become richer, but later fall behind the democratic society. I also discuss how democratic societies may be better able to take advantage of new technologies, and how the unequal distribution of income in an oligarchic society supports the oligarchic institutions and may keep them in place even when the become significantly costly to society.
This paper analyses, in a simple two-region model, the undertaking of noxious facilities when the central government has limited prerogatives. The central government decides whether to construct a noxious facility in one of the regions, and how to …nance it. We study this problem under both full and asymmetric information on the damage caused by the noxious facility in the host region. We particularly emphasize the role of the central government prerogatives on the optimal allocations. We …nally discuss our results with respect to the previous literature on NIMBY and argue that taking into account these limited prerogatives is indeed important.
This paper argues that campaign finance policy, in the form of contribution limits and matching public financing, can be Pareto improving even under very optimistic assumptions concerning the role of campaign advertising and the rationality of voters. The optimistic assumptions are that candidates use campaign contributions to convey truthful information to voters about their qualifications for office and that voters update their beliefs rationally on the basis of the information they have seen. The argument also assumes that campaign contributions are provided by interest groups and that candidates can offer to provide policy favors to attract higher contributions.
The authors develop a positive theory of how interest-group competition shapes the organization of Congress and use it to explain campaign contribution patterns in financial services. Since interest groups cannot enforce fee-for-service contracts with legislators, legislators have an incentive to create specialized, standing committees which foster repeated dealing between interests and committee members. The resulting reputational equilibrium supports high contributions and high legislative effort for the interests. Contribution patterns by competing interests in the congressional battle over whether banks can enter new businesses support the theory, which also has implications for term limits and campaign reform. Copyright 1998 by American Economic Association.
Examination of firms in 47 countries shows a widespread overlap of controlling shareholders and top officers who are connected with national parliaments or governments, particularly in countries with higher levels of corruption, with barriers to foreign investment, and with more transparent systems. Connections are diminished when regulations set more limits on official behavior. Additionally, I show that the announcement of a new political connection results in a significant increase in value.
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. Most explanations gave at least some role to investor panic, which had led to a massive outflow of foreign capital. At the root of this hysteria, however, were concerns that the capital that had flowed into Indonesia and elsewhere in Southeast Asia had not been used for productive investments. Much of this discussion focused on the role of political connections in driving investment. The claim was that in Southeast Asia, political connectedness, rather than fundamentals such as productivity, was the primary determinant of profitability and that this had led to distorted investment decisions. Obviously, the degree to which this type of problem was truly responsible for the Asian collapse depends very much on the extent to which connectedness really was a primary determinant of firm value. In making the argument that this was in fact the case, anecdotes about the business dealings of President Suharto’s children were often cited as evidence. Such stories suggest that the value of some firms may have been highly dependent on their political connections. However, investigations in this area have not progressed beyond the level of case study and anecdote. That is, there has been no attempt to estimate the degree to which firms rely on connections for their profitability. There are numerous difficulties that would
The authors investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. The authors find that factors identified by previous studies as correlated in the cross-section with firm leverage in the United States are similarly correlated in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical underpinnings of the observed correlations are still largely unresolved. Copyright 1995 by American Finance Association.
The event study is an important research tool in economics and finance. The goal of an event study is to measure the effects of an economic event on the value of firms. Event study methods exploit the fact that, given rationality in the marketplace, the effects of an event will be reflected immediately in security prices. Thus the impact can be measured by examining security prices surrounding the event. In this paper event study methods are described including some of the potential complications. An example is included to illustrate the approach.
Indicators of the development of the financial sector do not improve monotonically over time. In particular, we find that by most measures, countries were more financially developed in 1913 than in 1980 and only recently have they surpassed their 1913 levels. This pattern cannot be explained by structural theories that attribute cross-country differences in financial development to time-invariant factors, such as a country's legal origin or culture. We propose an "interest group" theory of financial development where incumbents oppose financial development because it breeds competition. The theory predicts that incumbents' opposition will be weaker when an economy allows both cross-border trade and capital flows. This theory can go some way in accounting for the cross-country differences and the time series variation of financial development. When we recognize that different kinds of institutional heritages afford different scope for private interests to express themselves, we obtain a...
Betting on Hitler: the value of political connections in Nazi Germany Working Paper, University of Massachusetts and Universitat Pompeu Fabra Estimating the value of political connections
- T Ferguson
- H Voth
Ferguson, T., Voth, H., 2005. Betting on Hitler: the value of political connections in Nazi Germany. Working Paper, University of Massachusetts and Universitat Pompeu Fabra. r39 Fisman, R., 2001. Estimating the value of political connections. American Economic Review 91, 1095-1102
Related lending Event studies in economics and finance
- La Porta
- R Lopez
- De- Silanes
- F Zamarripa
La Porta, R., Lopez-de-Silanes, F., Zamarripa, G., 2003. Related lending. Quarterly Journal of Economics 118, 231-268. r40 MacKinlay, C., 1997. Event studies in economics and finance. Journal of Economic Literature 35, 13-39
Campaign finance regulations and the return on investment from campaign contributions
- S Ansolabehere
- J Snyder
- M Ueda
Ansolabehere, S., Snyder, J., Ueda, M., 2004. Campaign finance regulations and the return on
investment from campaign contributions. Mimeo, MIT.
Estimating the value of connections to Vice President Cheney. Mimeo. Columbia University PACs and the congressional supermarket: the currency is complex
- D Fisman
- R Fisman
- J Galef
- R Khurana
Fisman, D., Fisman, R., Galef, J., Khurana, R., 2006. Estimating the value of connections to Vice President Cheney. Mimeo. Columbia University, New York, NY. Grenzke, J., 1989. PACs and the congressional supermarket: the currency is complex. American Journal of Political Science 33, 1–24.
Do stock return vary with campaign contributions? The Bush versus Gore 2000 presidential elections, Unpublished working paper Campaign contributions as investments: the US House of Representatives
- J Shon
Shon, J., 2006. Do stock return vary with campaign contributions? The Bush versus Gore 2000 presidential elections, Unpublished working paper. City University of New York, New York, NY. Snyder, J., 1990. Campaign contributions as investments: the US House of Representatives, 1980–1986.
Careerism and its consequences: federalism, elections, and policy-making in Brazil
- D Samuels
Samuels, D., 1998. Careerism and its consequences: federalism, elections, and policy-making in
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