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Political Connection as an Investor Endorsement Device (CEIBS Working Paper, No. 008/2020/FIN)

Abstract

Due to its value to private firms, a firm’s political connection (PC) enhances the alignment of external
investors with insiders, thereby mitigating the adverse impact of market frictions on corporate financing and
investment. This has important implications on corporate policies and governance. Using various
identification strategies, we show that PC firms are more likely to issue equity and invest more, while paying
out less in dividends. The market responds more positively to news of equity issuance and investment, but
less so to news of dividend payouts by PC firms. Moreover, external investors vote more favorably on
managerial proposals in PC firms’ annual meetings. And analysts are more optimistic in their forecasts of
earnings by PC firms. The evidence is consistent with PC as an investor endorsement device, which in turn
incentivizes unconnected firms to proactively seek PC. 

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Author Community

[Cao, Jerry Xiaping] Shenzhen University

[Huang, Sheng] China Europe International Business School (CEIBS)

[Liu, Qigui] Zhejiang University

[Tian, Gary] Macquarie Universityd


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Source

Year:2020

Publish Date:2020-04

Language:English

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