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Political connections, corporate governance and preferential bank loans

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  • Yeh, Yin-Hua
  • Shu, Pei-Gi
  • Chiu, Shean-Bii

Abstract

The presidential election in Taiwan during 2000 resulted in the first political changeover in more than fifty years from the ruling party, the Kuomintang (KMT), to the Democratic Progressive Party (DPP). In 2004, the KMT was expected to win, but eventually lost to the DPP. We use these two exogenous events to investigate three issues: how political connections are related to preferential bank loans, how the entrenched position of the ruling party affects the types of preferential bank loans and how corporate governance is related to preferential bank loans. We find that KMT-connected (DPP-connected) firms were associated with higher (lower) abnormal returns before the 2004 election. This pattern of returns was reversed after the unexpected result. Moreover, we find that political connections were positively correlated with preferential bank loans. However, the types of preferential bank loans differed between KMT-connected and DPP-connected firms due to differences in the entrenched power of the ruling party. Finally, we find that corporate governance is negatively correlated with preferential bank loans, probably because firms with good corporate governance have more alternative financial sources.

Suggested Citation

  • Yeh, Yin-Hua & Shu, Pei-Gi & Chiu, Shean-Bii, 2013. "Political connections, corporate governance and preferential bank loans," Pacific-Basin Finance Journal, Elsevier, vol. 21(1), pages 1079-1101.
  • Handle: RePEc:eee:pacfin:v:21:y:2013:i:1:p:1079-1101
    DOI: 10.1016/j.pacfin.2012.08.003
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    Cited by:

    1. Rajwani, Tazeeb & Liedong, Tahiru Azaaviele, 2015. "Political activity and firm performance within nonmarket research: A review and international comparative assessment," Journal of World Business, Elsevier, vol. 50(2), pages 273-283.
    2. Sokolov, Vladimir & Solanko, Laura, 2016. "Political influence, firm performance and survival," BOFIT Discussion Papers 20/2016, Bank of Finland, Institute for Economies in Transition.
    3. Zhang, Huiming & Li, Lianshui & Zhou, Dequn & Zhou, Peng, 2014. "Political connections, government subsidies and firm financial performance: Evidence from renewable energy manufacturing in China," Renewable Energy, Elsevier, vol. 63(C), pages 330-336.
    4. Lai, Jung-Ho & Chen, Li-Yu, 2014. "The valuation effect of corporate governance on stakeholder wealth: Evidence from strategic alliances," International Review of Economics & Finance, Elsevier, vol. 32(C), pages 117-131.
    5. Shen, Jianfu & Firth, Michael & Poon, Winnie P.H., 2016. "Credit Expansion, Corporate Finance and Overinvestment: Recent Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 39(C), pages 16-27.
    6. Abubakr Saeed & Yacine Belghitar & Ephraim Clark, 2017. "Political connections and firm operational efficiencies: evidence from a developing country," Review of Managerial Science, Springer, vol. 11(1), pages 191-224, January.
    7. Li, Guoping & Zhou, Hong, 2015. "Political connections and access to IPO markets in China," China Economic Review, Elsevier, vol. 33(C), pages 76-93.

    More about this item

    Keywords

    Political connection; Corporate governance; Preferential bank loan;

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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