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Political connections, bailout in financial markets and firm value

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journal contribution
posted on 2019-02-07, 12:03 authored by S Banerji, M Duygun, M Shaban
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.

History

Citation

Journal of Corporate Finance, 2018, 50, pp. 388-401

Author affiliation

/Organisation/COLLEGE OF SOCIAL SCIENCES, ARTS AND HUMANITIES/School of Business

Version

  • AM (Accepted Manuscript)

Published in

Journal of Corporate Finance

Publisher

Elsevier

issn

0929-1199

Acceptance date

2016-12-08

Copyright date

2016

Available date

2019-02-07

Publisher version

https://www.sciencedirect.com/science/article/pii/S0929119916303492?via=ihub

Language

en

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