The Payout Policy of Politically Connected Firms: Tunnelling vs. Reputation

Abstract

Using the firms’ directors who have a background in politics as a measure of political connections, we analyze the relationship between political ties and dividend policy in a sample of listed Spanish firms. We find that political connections are positively related with cash dividends. This result is consistent with a concern about the interests of minority shareholders in the politically connected firms or with the less financial constraints of these firms. We also find a positive relationship between political connections and share repurchases, a way of shareholder compensation that is gaining popularity. This result could be related to the valuation of politically connected firms. Our results are robust to alternative empirical specifications such as the propensity score matching procedure, different metrics of payout policy, and different levels of political connections. Interestingly, the recent financial crisis has not changed the preferences of connected firms for shareholders compensation with dividends and share repurchases.

Keywords: Political connections, dividends, dominant owners, share repurchases, board of directors

JEL Classification: G34, G35