Sheltering Corporate Assets from Political Extraction
Università Cattolica del Sacro Cuore, Milano
Purdue University - Krannert School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
John J. McConnell
May 7, 2008
AFA 2009 San Francisco Meetings Paper
We hypothesize that firms structure their asset holdings so as to shelter assets from extraction by politicians and bureaucrats. Specifically, in countries where the threat of political extraction is higher, we hypothesize that firms will hold a lower fraction of their assets in liquid form. Consistent with this conjecture, using firm-level data from 109 countries, we find that, across countries, corporate holdings of cash and marketable securities are negatively correlated with measures of political corruption. Further, we find that annual investment in property, plant, equipment, and inventory plus dividends is positively correlated with the measures of corruption suggesting that owners channel their cash into harder to extract assets. To the extent that this deployment of assets is less efficient than would occur in the absence of the threat of political extraction, corporate sheltering of assets may represent a channel through which corruption reduces economic growth.
Number of Pages in PDF File: 51
JEL Classification: F30, G3, G31, G38
Date posted: March 25, 2008 ; Last revised: June 29, 2009
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