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Review of Quantitative Finance and Accounting

, Volume 53, Issue 4, pp 1099–1133 | Cite as

Political connections and corporate financial decision making

  • Yacine Belghitar
  • Ephraim Clark
  • Abubakr SaeedEmail author
Original Research

Abstract

This paper investigates whether and how political connections influence managerial financial decisions. Our study reveals that those firms that have a politician on its board of directors are highly leveraged, use more long-term debt, hold large excess cash and are associated with low quality financial reporting compared to their non-connected counterparts. These effects escalate with the strength of the connected politician and whether he or his party is in power. The winning party effect is observed to be stronger than victory by the politician himself. Overall, our paper provides strong evidence that political connection is a two-edged sword. It is indeed a valuable resource for connected firms, but it comes at a cost of higher agency problems.

Keywords

Political connection Earnings management Financial policies Emerging market 

JEL Classification

G32 G34 O53 

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Cranfield UniversityCranfieldUK
  2. 2.Middlesex UniversityLondonUK
  3. 3.COMSATS UniversityIslamabadPakistan

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