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THE IMPACT OF POLITICAL CONNECTIONS ON FIRMS’ OPERATING PERFORMANCE AND FINANCING DECISIONS

Authors


  • We appreciate the helpful comments and suggestions offered by Maria Boutchkova, Mara Faccio, Omrane Guedhami, Claude Laurin, Yan Li, William L. Megginson, Magali Valero, Dazhi Zheng, the editors Gerald Gay and Jayant Kale, an anonymous reviewer, and seminar participants at Massey University, the University of Canterbury, IESEG School of Management, Erasmus University, Vlerick Leuven Gent Management School, Universidade Catolica Portuguesa, St. George's University, and the American University of Beirut. Our research has also benefited from comments from participants at the 2008 Australasian Finance and Banking Conference in Sydney, Australia; the 2008 European International Business Academy Meeting in Tallinn, Estonia; the 2009 Eastern Finance Association Annual Meeting in Washington, DC; and the 2009 Midwest Finance Association Meeting in Chicago, Illinois. We are grateful to Mara Faccio for sharing data. We are indebted to Eleonara Axelova and Samira Lehlou for excellent research assistance. All errors remain our responsibility. The financial support of the Social Sciences and Humanities Research Council of Canada, le Fonds Québécois de la Recherche sur la Société et la Culture, and le Centre de Recherche en e-Finance (HEC Montreal) is gratefully acknowledged.

Abstract

We investigate the impact that the political connections of publicly traded firms have on their performance and financing decisions. Using a long-term event study covering a sample of 234 politically connected firms headquartered in 12 developed and 11 developing countries from 1989 to 2003, we find that firms increase their performance and indebtedness after the establishment of a political connection. We also find that the political connection is more strongly associated with changes in leverage and operating performance for firms with closer ties to political power. Overall, our study confirms that politically connected firms gain easier access to credit and reap benefits in terms of performance from their ties with politicians.

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