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Political connections and the cost of equity capital

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  • Boubakri, Narjess
  • Guedhami, Omrane
  • Mishra, Dev
  • Saffar, Walid

Abstract

Motivated by recent research on the costs and benefits of political connection, we examine the cost of equity capital of politically connected firms. Using propensity score matching models, we find that politically connected firms enjoy a lower cost of equity capital than their non-connected peers. We find further that political connections are more valuable for firms with stronger ties to political power. In additional analyses, we find that the effect of political connection on firms' equity financing costs is influenced by the prevailing country-level institutional and political environment, and by firm characteristics. Taken together, our findings provide strong evidence that investors require a lower cost of capital for politically connected firms, which suggests that politically connected firms are generally considered less risky than non-connected firms.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 18 (2012)
Issue (Month): 3 ()
Pages: 541-559

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Handle: RePEc:eee:corfin:v:18:y:2012:i:3:p:541-559

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Political connections; Corporate governance; Cost of capital;

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References

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Citations

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Cited by:
  1. Joël CARIOLLE, 2014. "Corruption in Turbulent Times: a Response to Shocks?," Working Papers P106, FERDI.
  2. Arvate, Paulo & Barbosa, Klenio de Souza & Fuzitani, Eric, 2013. "Campaign donation and government contracts in Brazilian states," Textos para discussão 336, Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil).
  3. Amore, Mario Daniele & Bennedsen, Morten, 2013. "The value of local political connections in a low-corruption environment," Journal of Financial Economics, Elsevier, Elsevier, vol. 110(2), pages 387-402.
  4. Ma, Liangbo & Ma, Shiguang & Tian, Gary, 2013. "Political connections, founder-managers, and their impact on tunneling in China's listed firms," Pacific-Basin Finance Journal, Elsevier, Elsevier, vol. 24(C), pages 312-339.
  5. Carretta, Alessandro & Farina, Vincenzo & Gon, Abhishek & Parisi, Antonio, 2011. "Politicians “on board”! Do political connections affect banking activities in Italy?," MPRA Paper 33549, University Library of Munich, Germany.
  6. Emmanuelle Nys & Amine Tarazi & Irwan Trinugroho, 2013. "Political Connections, Bank Deposits, and Formal Deposit Insurance: Evidence from an Emerging Economy," Working Papers hal-00916513, HAL.
  7. Joël CARIOLLE, 2014. "Corruption in Turbulent Times: a Response to Shocks?," Working Papers P106, FERDI.
  8. Matthew Hill & Kathleen Fuller & G. Kelly & Jim Washam, 2014. "Corporate cash holdings and political connections," Review of Quantitative Finance and Accounting, Springer, vol. 42(1), pages 123-142, January.
  9. Polsiri, Piruna & Jiraporn, Pornsit, 2012. "Political connections, ownership structure, and financial institution failure," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 22(1), pages 39-53.

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