Political Relationships, Global Financing and Corporate Transparency
AbstractThis study examines the financing choices of firms operating in a weak institutional environment. We argue that in relationship-based systems, global financing and political connections are substitutes: Well-connected firms are less likely to access foreign capital markets because (state-owned) domestic banks provide capital at low cost. Moreover, the additional scrutiny that comes with foreign securities might be at odds with close political ties at home. Using data from Indonesia, we provide strong support for this hypothesis. Firms with close political ties to former President Soeharto are significantly less likely than non-connected firms to have publicly traded foreign securities. We also examine how returns before and during the Asian financial crisis differ between firms with and without foreign securities. The former performed significantly better during the crisis, and their performance advantage increases considerably once we control for a firm?s closeness to the Soeharto regime. We show that simple return regressions in earlier work are downward biased if domestic opportunities such as political connections are ignored.
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Bibliographic InfoPaper provided by Center for Research in Economics, Management and the Arts (CREMA) in its series CREMA Working Paper Series with number 2003-03.
Date of creation: Aug 2003
Date of revision:
Disclosure; Cross listing; Financing choices; Emerging market economies; Asian financial crisis; Indonesia; Cost of capital;
Other versions of this item:
- Christian Leuz & Felix Oberholzer-Gee, . "Political Relationships, Global Financing and Corporate Transparency," Center for Financial Institutions Working Papers 03-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
- P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
- K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
- K42 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Illegal Behavior and the Enforcement of Law
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ACC-2005-06-05 (Accounting & Auditing)
- NEP-ALL-2005-06-05 (All new papers)
- NEP-FIN-2005-06-05 (Finance)
- NEP-LAW-2005-06-05 (Law & Economics)
- NEP-POL-2005-06-05 (Positive Political Economics)
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