Political Connections and the Cost of Equity Capital

Boubakri, Narjess; Guedhami, Omrane; Mishra, Dev R.; Saffar, Walid

doi:10.2139/ssrn.1589688

Cited by 168 publications

(328 citation statements)

References 107 publications

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“…Originally, we are expected to use the full sample for the empirical regression analysis. However, in the spirit of Boubakri et al (2012) and Guedhami et al (2014), we employ propensity score matching approach to mitigate the concern that variations in the turnover-performance relationship are driven by other firm characteristics rather than political connections. Taking firms that hire politically connected CEOs as our treatment sample, we construct a control sample by analyzing the propensity score for selecting politically connected CEOs for each firm and then matching each firm in the treatment sample to a firm with a nonpolitically connected CEO.…”

Section: Political Connections and Turnover-performance Sensitivity Umentioning

confidence: 99%

“…The matching criterion is that the potential matching firm has the same propensity score for CEOs' political connections or, when no such match exists, the closest one with no more than a 2% deviation in propensity score; otherwise, the firm is dropped from the matching process. In particular, we obtain the propensity score for CEO political connections by regressing Political against a set of variables, including firm size, firm age, board size, leverage, book-to-market ratio, following Chen et al (2011), Boubakri et al (2012) and Guedhami et al (2014). To validate our sample construction using propensity score matching approach, we conduct univariate tests to compare firm and CEO characteristics between the treatment sample and the control sample.…”

Section: Political Connections and Turnover-performance Sensitivity Umentioning

confidence: 99%

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Political capital and CEO entrenchment: Evidence from CEO turnover in Chinese non-SOEs

Cao¹,

Pan

Qian

et al. 2017

Journal of Corporate Finance

115

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Previous theoretical and empirical studies suggest that CEOs' political connections are valuable to firms. We examine whether such connections become entrenched if the expected political capital fails to materialize and the firm lacks other types of political power. Using a sample of listed non-SOEs in China, we show that politically connected CEOs have a lower probability of turnover and cause a weaker turnover-performance sensitivity than non-politically connected CEOs. Further analyses show that these turnover patterns are not consistent with alternative explanations, such as superior managerial ability, being a member of controlling families or being promoted from the inside. The turnover patterns are less pronounced in firms with alternative political power, such as connected boards or being vital to the local economy. Following the turnover of politically connected CEOs, firm performance does not necessarily undergo significant improvement. Our results call for new theories that comprehend the real effects of political connections. AbstractPrevious theoretical and empirical studies suggest that CEOs' political connections are valuable to firms. We examine whether such connections become entrenched if the expected political capital fails to materialize and the firm lacks other types of political power. Using a sample of listed non-SOEs in China, we show that politically connected CEOs have a lower probability of turnover and cause a weaker turnover-performance sensitivity than non-politically connected CEOs. Further analyses show that these turnover patterns are not consistent with alternative explanations, such as superior managerial ability, being a member of controlling families or being promoted from the inside. The turnover patterns are less pronounced in firms with alternative political power, such as connected boards or being vital to the local economy. Following the turnover of politically connected CEOs, firm performance does not necessarily undergo significant improvement. Our results call for new theories that comprehend the real effects of political connections.JEL classifications: G32, G34, G38

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Section: Political Connections and Turnover-performance Sensitivity Umentioning

confidence: 99%

Section: Political Connections and Turnover-performance Sensitivity Umentioning

confidence: 99%

Political capital and CEO entrenchment: Evidence from CEO turnover in Chinese non-SOEs

Cao¹,

Pan

Qian

et al. 2017

Journal of Corporate Finance

115

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“…About the access to finance, a great body of the literature emphasizes that firms using the revolving door are associated with a preferential access to finance (Khwaja and Mian, 2005;Boubakri et al, 2012) and are more likely to be bailed out after financial distress .…”

Section: The Rent-seeking Channel or "Quid-pro-quo Hypothesis": The Rmentioning

confidence: 99%

Financial Sector Regulation and the Revolving Door in US Commercial Banks

Brezis

Cariolle²

2016

Studies in Political Economy

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte.

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“…On the one hand, some empirical studies find that the benefits of political connections are i) an easier access to financial resources such as bank loans or others funds at more convenient conditions (Charumilind et al, 2006;Claessens et al, 2008;Fraser et al, 2006;Khwaja and Mian, 2005;Li et al, 2008); ii) a build up confidence in the legal system (Li et al, 2008); iii) an improved performance (Johnson and Mitton, 2003); iv) a higher probability of being bailed out ; v) an increase in firm value by, for example, increasing its stock value (Goldman et al, 2009), and vi) a lower cost of equity capital (Boubakri et al, 2012). On the other hand, some studies find negative impacts of being politically connected firms such as i) lower quality of accounting information (e.g.…”

Section: Introductionmentioning

confidence: 99%

Political connections, bank deposits, and formal deposit insurance

Nys

Tarazi

Trinugroho

2015

Journal of Financial Stability

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This paper investigates the impact of banks' political connections on their ability to collect deposits under two different deposit insurance regimes (blanket guarantee and limited guarantee). We estimate a simultaneous equations model of supply and demand for funds using quarterly data for Indonesian banks from 2002 to 2008. We find that, regardless of their type (state-owned or private entities), politically connected banks are able to attract deposits more easily than their non-connected counterparts. We also show that this effect is more pronounced after the implementation of formal deposit insurance with limited coverage. Our findings have various policy implications. Formal deposit insurance might have improved market discipline, as highlighted by earlier studies, but it has also exacerbated the issue of political connections in the banking sector. Political connections, bank deposits, and formal deposit insurance:Evidence from an emerging economy Abstract This paper investigates the impact of banks' political connections on their ability to collect deposits under two different deposit insurance regimes (blanket guarantee and limited guarantee). We estimate a simultaneous equations model of supply and demand for funds using quarterly data for Indonesian banks from 2002 to 2008. We find that, regardless of their type (state-owned or private entities), politically connected banks are able to attract deposits more easily than their non-connected counterparts. We also show that this effect is more pronounced after the implementation of formal deposit insurance with limited coverage. Our findings have various policy implications. Formal deposit insurance might have improved market discipline, as highlighted by earlier studies, but it has also exacerbated the issue of political connections in the banking sector.JEL Classification: G28, D72

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Political Connections and the Cost of Equity Capital

Cited by 168 publications

References 107 publications

Political capital and CEO entrenchment: Evidence from CEO turnover in Chinese non-SOEs

Political capital and CEO entrenchment: Evidence from CEO turnover in Chinese non-SOEs

Financial Sector Regulation and the Revolving Door in US Commercial Banks

Political connections, bank deposits, and formal deposit insurance

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