Political Connections and the Cost of Equity Capital
American University of Sharjah - School of Business and Management; HEC Montreal - Department of Finance
University of South Carolina - Moore School of Business
Dev R. Mishra
University of Saskatchewan - Edwards School of Business
Hong Kong Polytechnic University - School of Accounting and Finance
January 24, 2012
Motivated by recent research on the costs and benefits of political connection, we examine the cost of equity capital of politically connected firms. Using propensity score matching models, we find that politically connected firms enjoy a lower cost of equity capital than their non-connected peers. We find further that political connections are more valuable for firms with stronger ties to political power. In additional analyses, we find that the effect of political connection on firms’ equity financing costs is influenced by the prevailing country-level institutional and political environment, and by firm characteristics. Taken together, our findings provide strong evidence that investors require a lower cost of capital for politically connected firms, which suggests that politically connected firms are generally considered less risky than non-connected firms.
Number of Pages in PDF File: 45
Keywords: Political Connections, Corporate Governance, Cost of Capital
JEL Classification: G32, G34
Date posted: April 16, 2010 ; Last revised: January 24, 2012
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