Political Relationships, Global Financing and Corporate Transparency

This study examines the financing choices of firms operating in a weak institutional environment. We argue that in relationship-based systems, global financing and strong political connections are alternative means to create firm value. Well-connected firms might be less inclined to access global capital markets because (state-owned) domestic banks provide capital at low cost. Moreover, the expanded disclosures and additional scrutiny that come with issuing foreign securities might be at odds with close political ties at home because these ties can best be exploited when little is disclosed about the firm. Using data from Indonesia, we provide strong support for the hypothesis that global financing and political connections are substitutes: Firms with close political ties to former President Soeharto are significantly less likely than nonconnected firms to have publicly traded foreign securities. To study performance effects, we examine how returns during the Asian financial crisis differ between firms with and without foreign securities. Consistent with prior work, we find that firms with foreign securities exhibit higher returns during the crisis. However, our data indicate that politically well-connected firms also received considerable support during this period. These results suggest that previous estimates of cross-listing benefits are considerably biased if domestic opportunities such as political connections are ignored.