The Role Political Connections Play in Access to Finance: Evidence from Cross-Listing

Abstract

What role does political influence play in access to finance? Using a comprehensive crosscountry dataset, I characterize how and why domestic political connections affect firms' ability to access all types of finance-exploiting firms' cross-listing activity as a source of empirical identification. The results extend our understanding from recent single-country studies focused exclusively on domestic bank finance. First, political influence improves firms' access to finance beyond domestic (bank) debt markets-political connections also improve access to foreign, equity finance. Second, the mechanism through which political influence works to improve access to finance is broader than political coercion of local bankers-political connections function as a firm-level substitute for strong national property rights, reducing connected firms risk premiums vis-à-vis unconnected peers.

State Ownership, Socio-political Factors, and Labor Cost Stickiness

“…To identify political connections, we turn to Faccio's (2006) database. Although these data mostly refer to the year 2001, we assume, consistent with prior research (Faccio, 2006;Richter, 2010), that political connections persist unless dramatic or sudden political changes occur. 10 A dummy variable (PolCon) equals 1 if the private firm is politically connected and 0 otherwise.…”

Businesspeople in Elected Office: Identifying Private Benefits from Firm-Level Returns

“…One set of theories argues that political connections help firms by reducing uncertainty among financiers. When markets are underdeveloped, lenders have less information about potential clients and look for other signals of borrowing quality or property rights protection(Richter 2010). In a study of firms connected to parliamentarians in China,Truex (2014) finds little evidence of formal policy influence.…”

Political connections, corruption and access to credit in Vietnamese SMEs

“…The latter is called as acquired political connection that is created or developed via managerial-based political ties. Popular managerial-based political tie identified in many prior study is the case that firm's owner or director is a member or a former member of political organizations [25]; [7]; [13]; [26]; [10]; [27]; [28]; [29]; [15]; [12]. Acquired political connection can also be formed by informal ties of top officers through close relationship with political parties [25], pure chance personal encounters [7], campaign contributions [30] or regularly meetings with government or public officials dealing with regulatory issues [31].…”

“…Therefore, top officers can use firm's resources for rentseeking that increases the cost of firm [32]. However, acquired political connection also helps firm in access to finance from formal financial institution because politicians could pressure local bankers into offering better terms to politically connected firms and work within their institutional environment to reduce favored firms' risk premium [26]. Empirically, a large number of prior studies show that political connections can help firms in obtaining bank credit.…”