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

46 Pages Posted: 4 Aug 2005 Last revised: 17 Mar 2008

Felix Oberholzer-Gee

Harvard Business School, Strategy Unit

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

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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

Suggested Citation

Oberholzer-Gee, Felix and Leuz, Christian, Political Relationships, Global Financing and Corporate Transparency: Evidence from Indonesia. Journal of Financial Economics (JFE), 2006. Available at SSRN: https://ssrn.com/abstract=720741 or http://dx.doi.org/10.2139/ssrn.720741

Felix Oberholzer-Gee

Harvard Business School, Strategy Unit ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Christian Leuz (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1996 (Phone)

HOME PAGE: http://faculty.chicagobooth.edu/christian.leuz/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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

European Corporate Governance Institute (ECGI)

Brussels
Belgium

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

Center for Financial Studies (CFS) ( email )

Grüneburgplatz 1
Frankfurt am Main, 60323
Germany

University of Pennsylvania - Wharton Financial Institutions Center

3641 Locust Walk
Philadelphia, PA 19104-6218
United States

CESifo Research Network

Poschinger Str. 5
Munich, DE-81679
Germany

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