Impact Of Political Connections On Performance And Financing Decisions Of Public Listed Companies

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Overview: This paper investigates the impact of political connections on performance and financing decisions of public listed companies. There is a large body of literature documenting the impacts of political connections on the firms; however most of the studies are focused on a single country; for example Fisman (2001), Mobarak and Purbasari (2006) on Indonesia, Johnson and Mitton (2003) on Malaysia, Agrawal and Knoeber (2001) on US and Sapienza (2004) on Italy. Faccio (2006) and Faccio, Masulis and McConnell (2006) however, used an international sample and a cross country analysis approach to investigate the phenomenon of political connectivity across the globe. In this paper, the authors identify the gap in the literature to argue the…show more content…
Hypothesis 2: After the connection is established, politically connected firms become more indebted than their non-connected peers. Hypothesis 3: After the connection is established, politically connected firms use more long-term debt than non-connected peers. Results show a statistically significant increase in performance after a firm establishes a political connection. The results also compare financial leverage, use of long term debt and liquidity ratio three years before and after the establishment of political connection to report an increase in all these three measures of financing decisions, thus accepting all three hypotheses. Outline of research method and data analysis: This research uses the definition of Faccio (2006) to identify politically connected firms. A firm is defined as politically connected if any one of its officers (Director, CEO, Chairman, Vice chairman or Secretary) or a large shareholder (holding at least 10% voting rights) is a politician (member of parliament or cabinet, prime minister or president) or is closely related to a politician or political party. The research updates and extends the Faccio (2006) databases of company officers and politicians, and uses procedures and resources similar to those of Faccio (2006) to identify politically connected firms. The authors then move a step ahead by identifying the date of establishment of political connection i.e the date when a politician was appointed a board member or when a company
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