Essays on the relationship between political economy and corporate finance

Abstract

This dissertation studies the interactions between politicians, state and market. Specifically, it studies how connections to politicians or state may affect the corporate finance behavior of firms. The first chapter of this dissertation attempts to treat the sudden collapse of Mubarak regime in Egypt as a natural experiment to measure the value of political connections of Egyptian listed firms. It examines the cumulative abnormal return (CAR) of the stock price of Egyptian listed firms with and without political connections. It is found that personal connection of shareholders to the Mubarak regime could bring considerable positive value to Egyptian firms. Among these firms with personal political connection, those with concurrent state-ownership fared better. For firms without connection to Mubarak regime, state-ownership does not seem to matter in terms of stock returns. The second chapter extends the study of chapter one by investigating a potential channel which political connections can bring benefit to a firm. Specifically, it examines whether political connections can alleviate the financing constraints encountered by firms. It is found that alleviation of financing constraints could be best attained by having both personal political connection of shareholders to the Mubarak regime and institutional political connection through ownership by the state. However, institutional political connection per se does not provide strong evidence on financing constraint alleviation. This chapter enriches the literature by adding evidence that the benefit of institutional level of political connection may need to be realized through personal political connections, and that diversification in political capital could play a role in benefiting from political cronyism. Whilst extant literature suggests that political connection tends to intensify substantial shareholders' expropriation on minority shareholders, the third chapter is designed to address the query over the coexistence of higher firm value and higher expropriation found among politically-connected firms. The third chapter examines whether politically-connected firms with higher expropriation in normal business course would receive greater propping during financial distress, which the propping helps to reduce the downside risk of the firms. If greater propping is available among politically-connected firms, investors may be willing to place higher value on these firms due to the lower downside risk embedded even though investors expect a higher expropriation (which implies lower expected return) in normal period. It is found that firms with personal political connection to Mubarak regime exhibit higher level of expropriation in normal period as well as higher level of debt-induced propping during crisis period. For firms with institutional political connection to the state, the expropriation level is not found higher than the market and there is also no evidence that they have higher level of debt-induced propping. The result shows that political connections do not always induce greater propping, but greater propping is only found on firms with greater expropriation. The results help to explain the coexistence of higher expropriation and higher firm value found among certain type of politically-connected firms, and it also highlights the potential differences between different types of political connections.

Date of Award	2 Oct 2013
Original language	English
Awarding Institution	City University of Hong Kong
Supervisor	Kit Ming Isabel YAN (Supervisor)