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Political Relationships, Global Financing and Corporate Transparency

  • Christian Leuz
  • Felix Oberholzer-Gee

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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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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  1. Geert Bekaert & Campbell R. Harvey & Christian Lundblad, 2001. "Does Financial Liberalization Spur Growth?," NBER Working Papers 8245, National Bureau of Economic Research, Inc.
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  4. Raymond Fisman, 2001. "Estimating the Value of Political Connections," American Economic Review, American Economic Association, vol. 91(4), pages 1095-1102, September.
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  11. 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.
  12. 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.
  13. Doidge, Craig & Karolyi, G. Andrew & Stulz, Rene M., 2004. "Why are foreign firms listed in the U.S. worth more?," Journal of Financial Economics, Elsevier, vol. 71(2), pages 205-238, February.
  14. 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.
  15. 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.
  16. Shahrokh M Saudagaran & Gary C Biddle, 1995. "Foreign Listing Location: A Study of MNCs and Stock Exchanges in Eight Countries," Journal of International Business Studies, Palgrave Macmillan, vol. 26(2), pages 319-341, June.
  17. Fan, Joseph P.H. & Wong, T.J., 2001. "Corporate Ownership Structure and the Informativeness of Accounting Earnings in East Asia," CEI Working Paper Series 2001-21, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  18. Shahrokh M Saudagaran, 1988. "An Empirical Study of Selected Factors Influencing the Decision to List on Foreign Stock Exchanges," Journal of International Business Studies, Palgrave Macmillan, vol. 19(1), pages 101-127, March.
  19. Stulz, Rene M, 1981. "On the Effects of Barriers to International Investment," Journal of Finance, American Finance Association, vol. 36(4), pages 923-34, September.
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