Political Connections and the Cost of Equity Capital

45 Pages Posted: 16 Apr 2010 Last revised: 24 Jan 2012

Narjess Boubakri

American University of Sharjah - School of Business and Management; HEC Montreal - Department of Finance

Omrane Guedhami

University of South Carolina - Moore School of Business

Dev R. Mishra

University of Saskatchewan - Edwards School of Business

Walid Saffar

Hong Kong Polytechnic University - School of Accounting and Finance

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

Suggested Citation

Boubakri, Narjess and Guedhami, Omrane and Mishra, Dev R. and Saffar, Walid, Political Connections and the Cost of Equity Capital (January 24, 2012). Available at SSRN: https://ssrn.com/abstract=1589688 or http://dx.doi.org/10.2139/ssrn.1589688

Narjess Boubakri

American University of Sharjah - School of Business and Management ( email )

P.O. Box 26666
Sharjah
United Arab Emirates

HOME PAGE: http://www.aus.edu

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Dev R. Mishra (Contact Author)

University of Saskatchewan - Edwards School of Business ( email )

Department of Finance and Management Science
Saskatoon, Saskatchewan S7N 5A7
Canada
306-966-8457 (Phone)
306-966-2515 (Fax)

Walid Saffar

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Li Ka Shing Tower
Hong Hum
Kowloon
Hong Kong

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