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Political connections and corporate financial decision making

Author

Listed:
  • Yacine Belghitar

    () (Cranfield University)

  • Ephraim Clark

    () (Middlesex University)

  • Abubakr Saeed

    () (COMSATS University)

Abstract

This paper investigates whether and how political connections influence managerial financial decisions. Our study reveals that those firms that have a politician on its board of directors are highly leveraged, use more long-term debt, hold large excess cash and are associated with low quality financial reporting compared to their non-connected counterparts. These effects escalate with the strength of the connected politician and whether he or his party is in power. The winning party effect is observed to be stronger than victory by the politician himself. Overall, our paper provides strong evidence that political connection is a two-edged sword. It is indeed a valuable resource for connected firms, but it comes at a cost of higher agency problems.

Suggested Citation

  • Yacine Belghitar & Ephraim Clark & Abubakr Saeed, 2019. "Political connections and corporate financial decision making," Review of Quantitative Finance and Accounting, Springer, vol. 53(4), pages 1099-1133, November.
  • Handle: RePEc:kap:rqfnac:v:53:y:2019:i:4:d:10.1007_s11156-018-0776-8
    DOI: 10.1007/s11156-018-0776-8
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    More about this item

    Keywords

    Political connection; Earnings management; Financial policies; Emerging market;

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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