Download This PaperPolitical Connections and the Cost of Equity Capital
45 Pages Posted: 16 Apr 2010 Last revised: 24 Jan 2012
Date Written: January 24, 2012
Abstract
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.
Keywords: Political Connections, Corporate Governance, Cost of Capital
JEL Classification: G32, G34
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