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

Posted: 3 Aug 2006  

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 in firms' financing strategies and their long-run performance. We view political connections as an example for domestic arrangements which can reduce the benefits of global financing. Using data from Indonesia, we find that firms with strong political connections are less likely to have publicly traded foreign securities. As a result, estimates of the performance consequences of foreign financing are severely biased if value-creating domestic arrangements such as political relationships are ignored. Connections not only alter firms' financing strategies, they also influence long-run performance. Tracking returns across several regimes, we show that firms have difficulty re-establishing connections with a new government when their patron falls from power, leading closely connected firms to underperform under the new regime and subsequently to increase their foreign financing.

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

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

Suggested Citation

Oberholzer-Gee, Felix and Leuz, Christian, Political Relationships, Global Financing and Corporate Transparency: Evidence from Indonesia. Journal of Financial Economics, Vol. 81, pp. 411-439, August 2006. Available at SSRN: https://ssrn.com/abstract=920689

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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