Political Relationships, Global Financing and Corporate Transparency: Evidence from Indonesia

Abstract

This study examines the role of political connections for firms' financing strategies and their long-run financial performance. We view political connections as an example for domestic arrangements which can reduce the benefits of global financing. Consistent with this argument, we find that firms with close political ties are less likely than firms with weak connections to have publicly traded foreign securities. We also show that estimates of the performance consequences of foreign financing are severely biased if value-creating domestic arrangements such as political connections are ignored. Political relationships not only alter firms' financing strategies, they also impact the long-run performance of companies. Tracking returns across several changes in regimes, we document that firms have difficulty re-establishing connections with a new government when their patrons fall from power. As a result, closely-connected firms underperform under new regimes and subsequently increase their foreign financing.

Keywords: Cross listing, Financing choices, Emerging markets, Asian financial crisis, Indonesia, Disclosure

JEL Classification: P16, G32, G38, K22, K42, M41, M45, G18