Transactional and relational approaches to political connections and the cost of debt

Abstract

This paper examines the economic effects of a firm's approach to developing and maintaining political connections. Specifically, we investigate whether lenders favor transactional connection as opposed to relational connection. By tracing firms in a politically volatile emerging democracy in Indonesia, we find that firms following a transactional political connection strategy experience a relatively lower cost of debt than those with a relational strategy. The effect is more pronounced for firms facing high financial distress. The finding is robust to cost of bank loans and a variety of regression methods. Overall, the evidence suggests that in times of frequently changing political regimes, firms benefit from a transactional relationship with politicians as it enables to update connection with the government in power. Relational connection is valuable for a firm only when the political regime connected with it gains power.

Board Structure Problem in Aviation Companies: The Relationship of Political Connection and Multiple Directorship on Firm Performance

“…Thus, the results confirm that the board members' political connection in aviation companies in Asia significantly influences the aviation companies' performance. The result of this study is in line with the previous research's results from Brown (2016), (Wong & Hooy, 2018), and Arifin et al (2020), which state that political connection has a positive effect on firm performance. The result of the research also supports the study done by (Brogaard et al, 2021).…”

“…Political connections in business are informal relations between companies and government officials or politicians and are carried out in various ways. A firm is politically connected if at least one board member is a current or former minister, parliament, government official, or other politicians (Arifin et al, 2020). The political connection influences corporate financial reporting and performance with four impacts (Preuss & Königsgruber, 2021).…”

“…Moreover, the firms also successfully get advantages in financial and business aspects and increase their governance system. A recent study by Arifin et al (2020) found that the practice made the firms get a relatively lower cost of debt. In addition, the firms gain the upper hand from a transactional relationship with politicians since they will give the firm an updated connection with the government in power.…”

“…1. Political Connection A firm is politically connected if at least one board member is a current or former minister, parliament, government official, or politician (Arifin et al, 2020). Thus, we use the proportion of politically connected board members by counting the number of the board of commissioner members who have experience as a former minister, government, and military officials dividing it by the total number of boards of commissioner members.…”

Islamic Banks’ Stability: Full-Fledged vs Islamic Windows

“…The choice of using RE for panel data analysis is because the main variable of interest of IW (Islamic Windows) is a rarely changing variable or relatively time-invariant variable. The use of fixed effects, in this case, is inappropriate (Arifin, Hasan, & Kabir, 2020;Doumpos, Hasan, & Pasiouras, 2017). The coefficient of β_1become the main focus; if the β_1 significant, it implies that Islamic windows' stability differs from their full-fledged counterparts.…”