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Sheltering Corporate Assets from Political Extraction

51 Pages Posted: 25 Mar 2008 Last revised: 29 Jun 2009

Lorenzo Caprio

Università Cattolica del Sacro Cuore, Milano

Mara Faccio

Purdue University - Krannert School of Management; University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

John J. McConnell

Purdue University

Date Written: May 7, 2008

Abstract

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.

JEL Classification: F30, G3, G31, G38

Suggested Citation

Caprio, Lorenzo and Faccio, Mara and McConnell, John J., Sheltering Corporate Assets from Political Extraction (May 7, 2008). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1090968 or http://dx.doi.org/10.2139/ssrn.1090968

Lorenzo Caprio

Università Cattolica del Sacro Cuore, Milano ( email )

Largo Gemelli, 1
Milan, Milan 20122
Italy
02 7234.2768 (Phone)

Mara Faccio (Contact Author)

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

John J. McConnell

Purdue University ( email )

MGMT, KRAN
403 West State St.
West Lafayette, IN 47907-2056
United States
765-494-5910 (Phone)
765-494-7863 (Fax)

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