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Political Relationships, Global Financing and Corporate Transparency

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Author Info
Christian Leuz
Felix Oberholzer-Gee

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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 strong political connections are alternative means to create firm value. Well-connected firms might be less inclined to access global capital markets because (state-owned) domestic banks provide capital at low cost. Moreover, the expanded disclosures and additional scrutiny that come with issuing foreign securities might be at odds with close political ties at home because these ties can best be exploited when little is disclosed about the firm. Using data from Indonesia, we provide strong support for the hypothesis that global financing and political connections are substitutes: Firms with close political ties to former President Soeharto are significantly less likely than nonconnected firms to have publicly traded foreign securities. To study performance effects, we examine how returns during the Asian financial crisis differ between firms with and without foreign securities. Consistent with prior work, we find that firms with foreign securities exhibit higher returns during the crisis. However, our data indicate that politically well-connected firms also received considerable support during this period. These results suggest that previous estimates of cross-listing benefits are considerably biased if domestic opportunities such as political connections are ignored.

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Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 03-16.

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Handle: RePEc:wop:pennin:03-16

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Find related papers by JEL classification:
P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
K22 - Law and Economics - - Regulation and Business Law - - - Corporation 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

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  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. [Downloadable!] (restricted)
    Other versions:
  2. Errunza, Vihang R. & Miller, Darius P., 2000. "Market Segmentation and the Cost of the Capital in International Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 35(04), pages 577-600, December. [Downloadable!]
  3. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, vol. 96(1), pages 369-386, March. [Downloadable!]
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  5. repec:pal:jintbs:v:19:y:1988:i:1:p:101-127 is not listed on IDEAS
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  8. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September. [Downloadable!] (restricted)
  9. Claessens, Stijn & Djankov, Simeon & Lang, Larry H. P., 2000. "The separation of ownership and control in East Asian Corporations," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 81-112. [Downloadable!] (restricted)
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  11. Mitton, Todd, 2002. "A cross-firm analysis of the impact of corporate governance on the East Asian financial crisis," Journal of Financial Economics, Elsevier, vol. 64(2), pages 215-241, May. [Downloadable!] (restricted)
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  13. repec:pal:jintbs:v:26:y:1995:i:2:p:319-341 is not listed on IDEAS
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  16. Blass, Asher & Yafeh, Yishay, 2001. "Vagabond shoes longing to stray: Why foreign firms list in the United States," Journal of Banking & Finance, Elsevier, vol. 25(3), pages 555-572, March. [Downloadable!] (restricted)
  17. Johnson, Simon & Boone, Peter & Breach, Alasdair & Friedman, Eric, 2000. "Corporate governance in the Asian financial crisis," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 141-186. [Downloadable!] (restricted)
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  18. Sherman Cheung, C. & Lee, Jason, 1995. "Disclosure environment and listing on foreign stock exchanges," Journal of Banking & Finance, Elsevier, vol. 19(2), pages 347-362, May. [Downloadable!] (restricted)
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  20. Johnson, Simon & Mitton, Todd, 2003. "Cronyism and capital controls: evidence from Malaysia," Journal of Financial Economics, Elsevier, vol. 67(2), pages 351-382, February. [Downloadable!] (restricted)
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  21. Raghuram G. Rajan & Luigi Zingales, 1998. "Which Capitalism? Lessons from the East Asian Crisis," CRSP working papers 486, Center for Research in Security Prices, Graduate School of Business, University of Chicago. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Fan, Joseph P.H. & Huang, Jun & Oberholzer-Gee, Felix & Zhao, Mengxin, 2008. "Corporate Diversification in China: Causes and Consequences," CEI Working Paper Series 2008-3, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  2. 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. [Downloadable!]
  3. Durnev, Art & Fauver, Larry, 2008. "Stealing from Thieves: Firm Governance and Performance when States are Predatory," CEI Working Paper Series 2008-12, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  4. 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.). [Downloadable!]
  5. Art Durnev & Sergei Guriev, 2007. "The Resource Curse: A Corporate Transparency Channel," Working Papers w0108, Center for Economic and Financial Research (CEFIR). [Downloadable!]
    Other versions:
  6. Doidge, Craig & Karolyi, G. Andrew & Stulz, Rene M., 2004. "Why Do Countries Matter So Much for Corporate Governance?," Working Paper Series 2004-16, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  7. 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. [Downloadable!]
  8. 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 Revision, 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. [Downloadable!]
  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. [Downloadable!]
  10. 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. [Downloadable!] (restricted)
    Other versions:
  11. 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. [Downloadable!]
  12. Cheung, Yan-Leung & Rau, P. Raghavendra & Aris, Stouraitis, 2008. "The helping hand, the lazy hand, or the grabbing hand? Central vs. local government shareholders in publicly listed firms in China," CEI Working Paper Series 2008-11, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
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