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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 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.

Suggested Citation

  • Christian Leuz & Felix Oberholzer-Gee, "undated". "Political Relationships, Global Financing and Corporate Transparency," Center for Financial Institutions Working Papers 03-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
  • Handle: RePEc:wop:pennin:03-16
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    File URL: http://fic.wharton.upenn.edu/fic/papers/03/0316.pdf
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Doidge, Craig & Andrew Karolyi, G. & Stulz, Rene M., 2007. "Why do countries matter so much for corporate governance?," Journal of Financial Economics, Elsevier, vol. 86(1), pages 1-39, October.
    3. Durnev, Artyom & Guriev, Sergei, 2007. "The Resource Curse: A Corporate Transparency Channel," CEPR Discussion Papers 6547, C.E.P.R. Discussion Papers.
    4. Quoc-Anh Do & Bang Dang Nguyen & Yen-Teik Lee & Kieu-Trang Nguyen, 2011. "Out of Sight, Out of Mind:The Value of Political Connections in Social Networks," Working Papers 19-2011, Singapore Management University, School of Economics.
    5. 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.
    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. 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.).
    8. 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.

    More about this item

    JEL classification:

    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business 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; Personnel Economics - - Accounting - - - Accounting
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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