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Political Relationships, Global Financing and Corporate Transparency

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  • Christian Leuz
  • Felix Oberholzer-Gee

Abstract

This 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 Info

Paper provided by Center for Research in Economics, Management and the Arts (CREMA) in its series CREMA Working Paper Series with number 2003-03.

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Date of creation: Aug 2003
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Handle: RePEc:cra:wpaper:2003-03

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Keywords: Disclosure; Cross listing; Financing choices; Emerging market economies; Asian financial crisis; Indonesia; Cost of capital;

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References

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  1. Craig Doidge & G. Andrew Karolyi & Rene M. Stulz, 2001. "Why are Foreign Firms Listed in the U.S. Worth More?," NBER Working Papers 8538, National Bureau of Economic Research, Inc.
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Cited by:
  1. Durnev, Artyom & Guriev, Sergei, 2007. "The Resource Curse: A Corporate Transparency Channel," CEPR Discussion Papers 6547, C.E.P.R. Discussion Papers.
  2. Rene M. Stulz & Craig Doidge & Andrew Karolyi, 2004. "Why Do Countries Matter So Much for Corporate Governance?," NBER Working Papers 10726, National Bureau of Economic Research, Inc.
  3. Chung, Chi-Nien & Mahmood, Ishtiaq & Mitchell, Will, 2009. "Political Connections and Business Strategy: The Impact of Types and Destinations of Political Ties on Business Diversification in Closed and Open Political Economic," CEI Working Paper Series 2008-24, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  4. Thomas C O'Connor, 2007. "Cross-listing in the U.S. and domestic investor protection," Economics, Finance and Accounting Department Working Paper Series n1861107.pdf, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
  5. Karl V. Lins & Francis E. Warnock, 2004. "Corporate governance and the shareholder base," International Finance Discussion Papers 816, Board of Governors of the Federal Reserve System (U.S.).
  6. Allayannis, George & Brown, Gregory W. & Klapper, Leora F., 2005. "Legal effectiveness and external capital : the role of foreign debt," Policy Research Working Paper Series 3530, The World Bank.
  7. Francis , Bill B & Hasan, Iftekhar & Sun, Xian, 2009. "Political connections and the process of going public: evidence from China," Research Discussion Papers 7/2009, Bank of Finland.
  8. Chen, Hui & Parsley, David & Yang, Ya-wen, 2010. "Corporate Lobbying and Financial Performance," MPRA Paper 21114, University Library of Munich, Germany.
  9. Stulze, Rene M., 2008. "Securities Laws, Disclosure, and National Capital Markets in the Age of Financial Globalization," Working Paper Series 2008-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  10. Bunkanwanicha, Pramuan & Wiwattanakantang, Yupana, 2006. "Big Business Owners and Politics: Investigating the Economic Incentives of Holding Top Office," CEI Working Paper Series 2006-10, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  11. Zwart, G.J. de & Dijk, D.J.C. van, 2008. "The Inefficient Use of Macroeconomic Information in Analysts' Earnings Forecasts in Emerging Markets," Research Paper ERS-2008-007-F&A, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni.

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