Please use this identifier to cite or link to this item: http://hdl.handle.net/2381/43260
Title: Political connections, bailout in financial markets and firm value
Authors: Banerji, S
Duygun, M
Shaban, M
First Published: 22-Dec-2016
Publisher: Elsevier
Citation: Journal of Corporate Finance, 2018, 50, pp. 388-401
Abstract: The paper shows that politically motivated interventions in the financial market in the form of bailing out borrowing firms reduce banks’ incentives to gather valuable information about firms’ projects. This loss of information is a hidden cost which adversely affects firm value. Firms invest resources and pay a premium to politically connected persons (BOD or other personnel). Such connections serve the twin purposes of hedging and enhancement of the value of collateral pledged against bank loans. Feeling secured, banks lose incentives to monitor borrowing firms. Thus, wealth effect of bailout from political connection is partially offset by the losses of valuable information brought about by bank lending. In equilibrium, the trade-off from gains out of political connections and costs due to losses from information-based bank monitoring depend on (i) the country's disclosure laws, (ii) the political environment, (iii) the premium paid to form connections, and (iv) the state of the economy.
DOI Link: 10.1016/j.jcorpfin.2016.12.001
ISSN: 0929-1199
Links: https://www.sciencedirect.com/science/article/pii/S0929119916303492?via%3Dihub
http://hdl.handle.net/2381/43260
Version: Post-print
Status: Peer-reviewed
Type: Journal Article
Rights: Copyright © Elsevier, 2016. This version of the paper is an open-access article distributed under the terms of the Creative Commons Attribution-Non Commercial-No Derivatives License (http://creativecommons.org/licenses/by-nc-nd/4.0/), which permits use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or adaptations are made.
Appears in Collections:Published Articles, College of Social Science

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