Political Connection and Corporate Liquidity Policy: Evidence from Around the World

The stream of research on corporate liquidity has gained increasing attention. Recent papers have examined the impact of corporate governance (both country and firm levels) on corporate liquidity for the U.S. and international firms. However, the empirical findings on the agency cost explanation of cash holdings are relatively mixed. Meanwhile, a recent paper by Claessens, Feijen, and Laeven (2008) confirms that politically connected firms tend to receive favor in the form of more efficient access to bank financing. In this project, the researchers seek to examine the role of political connection on international firms' corporate liquidity policy. In addition, they further test the implications of cash holdings and political connection on firm value. Finally, they examine whether these relationships are more pronounced in emerging markets and in countries with weak legal protection of investors. The empirical results should shed more light on the determinants as well as consequences of international firms' corporate liquidity policy.