Political connections and the cost of equity capital

Narjess Boubakri, Omrane Guedhami, Dev Mishra, Walid Saffar

Research output: Journal article publicationJournal articleAcademic researchpeer-review

239 Citations (Scopus)

Abstract

Motivated by recent research on the costs and benefits of political connection, we examine the cost of equity capital of politically connected firms. Using propensity score matching models, we find that politically connected firms enjoy a lower cost of equity capital than their non-connected peers. We find further that political connections are more valuable for firms with stronger ties to political power. In additional analyses, we find that the effect of political connection on firms' equity financing costs is influenced by the prevailing country-level institutional and political environment, and by firm characteristics. Taken together, our findings provide strong evidence that investors require a lower cost of capital for politically connected firms, which suggests that politically connected firms are generally considered less risky than non-connected firms.
Original languageEnglish
Pages (from-to)541-559
Number of pages19
JournalJournal of Corporate Finance
Volume18
Issue number3
DOIs
Publication statusPublished - 1 Jun 2012
Externally publishedYes

Keywords

  • Corporate governance
  • Cost of capital
  • Political connections

ASJC Scopus subject areas

  • Business and International Management
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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