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Effects of time-varying political connections on loan contracts

Author

Listed:
  • Hao Fang
  • Chieh-Hsuan Wang
  • Joseph C.P. Shieh
  • Chien-Ping Chung

Abstract

Purpose - The authors construct two time-varying political connection (PC) indexes to measure a firm's political tendencies toward ruling and opposing parties and analyze whether a firm with ruling party tendencies obtains better bank loan contracts compared to the contracts obtained by a firm with opposing party tendencies and a firm with fixed PC tendencies. Design/methodology/approach - Linguistic text mining is used to construct the two time-varying PC indexes from news sources that reflect the tone and frequencies of characteristic texts to determine a firm's tendencies to favor the ruling or opposing parties. Findings - The results show that varying PC firms connected to the ruling party receive preferential loan contracts when their political tendencies increase but varying PC firms connected to the opposition party do not. In contrast, fixed PC firms gain similar benefits only when the connection is determined in the presidential election year but not in other years. Firms supporting two parties receive minimal financial rewards in terms of loan terms. Originality/value - In past studies, once a firm is identified as having a connection with a political party, it is assumed to have PC throughout the sample period (i.e. fixed PC firms). The authors lift this assumption and examine how varying PC affect bank loan contracts. The two time-varying PC indexes can identify a firm's more immediate party tendencies and more precise effects of a firm's party tendencies on bank loan contracts.

Suggested Citation

  • Hao Fang & Chieh-Hsuan Wang & Joseph C.P. Shieh & Chien-Ping Chung, 2023. "Effects of time-varying political connections on loan contracts," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 20(4), pages 853-871, October.
    • Handle: RePEc:eme:ijmfpp:ijmf-09-2022-0400
    DOI: 10.1108/IJMF-09-2022-0400
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    More about this item

    Keywords

    Political connection; Political party tendency; Text mining; Loan rates; Presidential election; G21; G32; G14; C21; C51; C61;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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