Political Connections

and the value of cash

holdings
 Negative relation between political
connections and cash holdings for firm in
emerging market and high corruption level.

How political connections affects

the value of cash holdings in an
international settings?

Shareholder that are politically connected in a

firm have a negatively valuation of cash holdings
Faccio (2006),

- A firm is classified as politically connected if,

~ At least one of its shareholders or one of top directors is a leader of the country, a minister,
a member of parliament or a close relative of a politician or a political party.

~ Among the developed countries,

- Italy have the highest level of corruption
- Finland have the lowest level of corruption

~ Among the emerging markets,

- Indonesia have the highest level of corruption
- Malaysia have the lowest level of corruption

~ However, all the emerging countries corruption level are higher than the average.
The study examine the relations between;

- Political connections and the value of cash holdings

~ result show that the presence of political connections is not associated with the value of
cash holdings for the overall sample.

- Country-level institutions, political connections and the value of holding cash

~ result shows that investors significantly discount the value of cash holdings for politically
connected firms (emerging markets and countries with high level of corruption)

- Different types of political connections and the value of holding cash

~ results shows that the higher prevalence of politically connected firms through large
shareholders in these markets.
Conclusion
- Political connections worsen the potential information asymmetry between
managers and shareholders of international firms. (especially weak countries
institutions)

- Shareholder that are politically connected in a firm have a negatively valuation of

cash holdings

- Political connections through large shareholders exert stronger influence compare

to directorship More likely to allocate significant resources to maintain political
relationship by rent-seeking activities.

- Political connections does not influence the value of cash holdings in a stronger
institutions. (developed and low corruption countries)
- Strong country help to mitigate the adverse effects of political connections
and encourage more efficient use of cash holdings.