Politically-Connected Firms: Can They Squeeze the State?

56 Pages Posted: 2 Apr 2002  

Mara Faccio

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

Date Written: March 23, 2002

Abstract

For a sample of 42 countries, I examine firms whose controlling shareholders and top managers are members of national parliaments or governments. I find that this overlap is quite widespread, especially in highly corrupted countries. Connected companies enjoy easier access to debt financing, lower taxation, and stronger market power. These benefits increase when companies are connected through their owner, with a minister, or a seasoned politician. Furthermore, these benefits are generally larger when the firm operates in a country with high corruption, low protection of property rights, a highly interventionist government, or a non-democratic government. Even though these connections provide significant benefits, connected firms under-perform their peers on an ex-ante basis. Therefore connections, by driving benefits to relatively poorly performing firms, distort the allocation of funds and investment decisions.

Keywords: Politican connections, ownership structure, board structure

JEL Classification: G30

Suggested Citation

Faccio, Mara, Politically-Connected Firms: Can They Squeeze the State? (March 23, 2002). AFA 2003 Washington, DC Meetings. Available at SSRN: https://ssrn.com/abstract=305099 or http://dx.doi.org/10.2139/ssrn.305099

Mara Faccio (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
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

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