Do political connections affect bank leverage? Evidence from some Middle Eastern and North African countries

Rihem Braham, Christian de Peretti () and Lotfi Belkacem
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Rihem Braham: LAREMFIQ - Laboratory Research for Economy, Management and Quantitative Finance - Institut des Hautes Etudes Commerciales (Université de Sousse), LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon, UCBL - Université Claude Bernard Lyon 1 - Université de Lyon
Christian de Peretti: ECL - École Centrale de Lyon - Université de Lyon, LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon
Lotfi Belkacem: LAREMFIQ - Laboratory Research for Economy, Management and Quantitative Finance - Institut des Hautes Etudes Commerciales (Université de Sousse), Université de Sousse

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Abstract: This study examines the association between political patronage and bank financing decisions in a sample of 34 commercial banks operating in the Middle East and North Africa for the period 2003–2014. We collected information manually about the profiles and biographies of individuals on the boards of banks to identify which banks had political connections, which is the novel contribution of the study. Linear and nonlinear panel data analysis was used to investigate this relationship. The results reveal that politically backed banks tend to be more leveraged. The indirect effect of political patronage on leverage was not found to be large, but was significant through its interaction with profitability; that is, politically backed banks with higher profitability are positively associated with leverage. Our findings imply that the privileges resulting from political ties make banks more profitable, and that this also leads to higher leverage. In line with the related literature, we found that a strong political presence on the boards of banks can be considered an important intangible asset, and one of the factors driving bank financing decisions.

Date: 2019-06-27
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Published in Journal of Management and Governance, 2019, 23 (4), pp.989-1006. ⟨10.1007/s10997-019-09478-w⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04875524

DOI: 10.1007/s10997-019-09478-w

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