 Political connections, bailout in financial markets and firm valueSanjay Banerji, Meryem Duygun and Mohamed Shaban Journal of Corporate Finance, 2018, vol. 50, issue C, 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. Keywords: Bank monitoring; Information production; Bailout; Political connection (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:50:y:2018:i:c:p:388-401 DOI: 10.1016/j.jcorpfin.2016.12.001 Access Statistics for this article Journal of Corporate Finance is currently edited by A. Poulsen and J. Netter More articles in Journal of Corporate Finance from Elsevier |
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