Can political and business connections alleviate financial constraints?

Abstract

This article examines the relationship between political and business connections (PBCs) and firms’ financial constraints. We proxy a firm’s PBCs by whether or not the firm’s CEO should hold a directorship in major trade organizations. Using an endogenous switching regression model, we find that firms with a connected CEO are less likely to be classified as financially constrained firms. Our results can provide a possible explanation why firms allow their CEOs to hold directorships in trade associations.

Keywords:

• political and business connections
• directorships
• trade associations
• financial constraints

JEL Classification:

• G21
• G31
• G32

Notes

¹ The studies of Fisman, (2001), Faccio (2006) and Bunkanwanicha and Wiwattanakantang (2009) show similar results.

² For example, Faccio (2006) considers firms to be politically connected when their executives are politicians. Fisman (2001) defined the political connections in Indonesia in terms of the closeness with Suharto and his family. Claessens et al. (2008) defined politically connected firms as those that provide political contributions to federal deputies in Brazil.

³ Please see the website of the biggest commerce associations for detail introductions. ROCCOC: http://www.roccoc.org.tw; CNFI: http://www.cnfi.org.tw; CNAIC: http://www.cnaic.org; CICD: http://cicd.org.tw

⁴ All the variables are defined in Table 1.

⁵ The differenced form of investment equation is used to remove the firm’s individual effects. The year dummies are also included.