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Political connections, financial constraints, and corporate investment

Author

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  • Chung-Hua Shen

    (National Taiwan University)

  • Chih-Yung Lin

    (Yuan Ze University)

Abstract

This study investigates whether firms politically connected to the ruling party can mitigate financial constraints and increase their investments. Data on Taiwan-listed companies from 1991 to 2010 are used to answer the preceding issue. Results indicate that firms connected to the ruling party that transitioned into power can mitigate financial constraints, but results do not hold for firms connected to the opposition party that transitioned out of power. Firms connected to both parties have similar results with those connected to the ruling party, but the diminishing effect is weaker than those connected to the ruling party. Results further indicate that financially constrained firms can increase their investment when they have political connections to the ruling party. Finally, firms with strong connections can reduce financial constraints more effectively.

Suggested Citation

  • Chung-Hua Shen & Chih-Yung Lin, 2016. "Political connections, financial constraints, and corporate investment," Review of Quantitative Finance and Accounting, Springer, vol. 47(2), pages 343-368, August.
    • Handle: RePEc:kap:rqfnac:v:47:y:2016:i:2:d:10.1007_s11156-015-0503-7
    DOI: 10.1007/s11156-015-0503-7
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    6. Alam, Ahmed W. & Houston, Reza & Farjana, Ashupta, 2023. "Geopolitical risk and corporate investment: How do politically connected firms respond?," Finance Research Letters, Elsevier, vol. 53(C).
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    8. Will Bartlett, 2023. "The performance of politically connected firms in South East Europe: state capture or business capture?," Post-Communist Economies, Taylor & Francis Journals, vol. 35(4), pages 351-367, May.
    9. Narayan, Paresh Kumar & Narayan, Seema & Tran, Vuong Thao & Thuraisamy, Kannan, 2021. "State-level politics: Do they influence corporate investment decisions?," International Review of Financial Analysis, Elsevier, vol. 74(C).
    10. René P. Orij & Saif Rehman & Hashim Khan & Faisal Khan, 2021. "Is CSR the new competitive environment for CEOs? The association between CEO turnover, corporate social responsibility and board gender diversity: Asian evidence," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(2), pages 731-747, March.
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    More about this item

    Keywords

    Political connections; Financial constraints; Endogenous switching model; The ruling party;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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