corporate political connections: impact on cost of debt, corpotare taxes, and investment efficiency

Taufiq Arifin is a PhD Student in the research group Finance & Accounting. His supervisor is professor Rezaul Kabir from the faculty of Behavioural, Management and Social Sciences.

Corporations are generally motivated to develop political connections with the government to create opportunities and acquire non-market resources. This phenomenon is prevalent, particularly in emerging economies, including Indonesia, due to weak law enforcement. This thesis begins with the fact that political connections do not always provide firms with benefits. It extends the prior literature by examining the effects of the various dimensions of political connections on the cost of borrowing, taxes, and investment efficiency.

In particular, the first project focuses on which approaches to gain political connections (transactional or relational) may benefit the firms through financing. Such pattern categorization is meaningful, especially in the post-Soeharto era in Indonesia with its frequent political regime changes. Firms may use different approaches to get politicians as board members. While a transactional approach solely focuses on short-term connections, a relational approach targets long-term affiliations. The results indicate that transactional political connections result in a low cost of debt and that this effect is strong for firms with high financial distress risks. Subsequently, the second project investigates the rent-seeking channel used by politicians by means of corporate taxes. This project sheds new light on how the approaches to political connections can influence the rent-seeking behavior. The evidence shows that politicians expropriate firm resources by increasing taxes to pursue their political objectives, e.g., electoral benefit. Interestingly, we only find this behavior in transactionally politically-connected firms. This evidence suggests that even though a transactional approach provides good connections with the current political regime, it also creates detrimental consequences for firms. Finally, the third project examines the further economic consequences of having different levels of political connections (local or national). The empirical evidence supports the grabbing-hand hypothesis by suggesting that politicians may intervene in corporate investment decisions, beyond the optimum level, resulting in over-investment. In summary, this thesis accentuates the various political connection dimensions and how they lead to different outcomes and consequences for firms.