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Do Strong Corporate Governance Firms Still Require Political Connection? Chung- Hua Shen Yu-Chun Wang Chih -Yung Lin PowerPoint PPT Presentation


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2012 NTU Conference . Do Strong Corporate Governance Firms Still Require Political Connection? Chung- Hua Shen Yu-Chun Wang Chih -Yung Lin . 2012.12.7. Outline:. 1. Introduction 2. The Data 3. Empirical Results 4. Conclusions . 1. Introduction. Main Question.

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Do Strong Corporate Governance Firms Still Require Political Connection? Chung- Hua Shen Yu-Chun Wang Chih -Yung Lin

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Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

2012 NTU Conference

Do Strong Corporate Governance Firms Still Require PoliticalConnection?

Chung-HuaShen

Yu-Chun Wang

Chih-Yung Lin

2012.12.7


Outline

Outline:

  • 1.Introduction

  • 2. The Data

  • 3. Empirical Results

  • 4. Conclusions


Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

1.Introduction


Main question

Main Question

  • whether a firm with strong CG still requires PC?

  • Are CG and PC Substitutionor complementary?

  • We also test whether CG or PC itself is enough for a firm to obtain better termsof bank loan contracts?


Literature

Literature

  • Previous studies commonly studied these two concepts separately.

  • However, their joint influence have been rarely discussed:

  • Chaney et al. (2011) demonstrated that among firms, those with PC reported lower quality of financial statements.

  • Wahab et al. (2011) argue that PC does not alter the positive relationship between CG and audit fees


Previous literature cg v s cost of debt

Previous Literature: CG v.s. Cost of debt

  • Negativecorrelation:

  • Bhojaraj and Sengupta (2003) stated that lower bond yields and higher credit ratings are associated with higher institutional ownership and a larger fraction of the board composed of non-officers.

  • Anderson et al. (2004): concluded that the cost of debt is inversely related to board independence and fully independent audit committees.

  • Lin et al. (2011) noted that the cost of borrowing is lower in firms with a narrower divergence between their control and cash flow rights.


Previous literature pc v s cost of debt

Previous Literature: PC v.s. Cost of debt

Negativecorrelation:

  • Sapienza (2004) determined that government-owned banks charge lower interest rates in regions where the bank-affiliated party obtained a higher voting rate.

  • Khwaja and Mian (2005) also examined the political influence on preferential treatment using data from Pakistan.

  • Claessens et al. (2008) discovered that contributing firms substantially increase their loan growth in comparison with non-contributing firms after each election.


Substitution concepts

Substitution Concepts

  • A firm with strong CG may obtain favorable loan contracts with their positive reputation, and needs no connections with the government.

  • PC is also valuable for firms, as politicians tend to give their supporters favors (Shleifer and Vishny, 1994).

  • However, both CG and PC is costly; hence, a firm can either develop its CG or build its PC.


Complementary concepts

Complementary Concepts

  • CG and PC may be complementary.

  • Although engaging in both CG and PC is costly, BUT it also increase the chance of the business.


Three hypotheses h1a

Three Hypotheses:H1a

  • Corporate governance can alleviate agency problems and improve corporate disclosures.

  • Ex:

  • Anderson et al. (2004): concluded that the cost of debt is inversely related to board independence and fully independent audit committees.

  • Lin et al. (2011) noted that the cost of borrowing is lower in firms with a narrower divergence between their control and cash flow rights.

  • Hypothesis 1a:

  • Better-governed firms could obtain better treatments in bank loan prices.


Three hypotheses h1b

Three Hypotheses:H1b

  • Most literature report that politically connected firms are more likely to obtain favored access to debt financing relative to non-connected firms.

  • Ex:

  • Sapienza (2004) determined that government-owned banks charge lower interest rates in regions where the bank-affiliated party obtained a higher voting rate.

  • Khwaja and Mian (2005) also examined the political influence on preferential treatment using data from Pakistan.

  • Hypothesis 1b:

  • Firms with stronger PCs could similarly obtain better treatments in bank loan prices.


Three hypotheses h2

Three Hypotheses:H2

  • We examine the correlation between CG and PC.

  • Ex:

  • Chaney et al. (2011) stated that among politically connected firms, those with stronger political ties have the poorest accruals quality.

  • Hypothesis 2:

  • The substitution view suggests politically connected firms have poorer governance, whereas the complementary view suggests that they have better governance.


Three hypotheses h3

Three Hypotheses:H3

  • We analyze whether CG and PC are substitutes or complements in determining bank loan contracting.

  • Hypothesis 3:

  • The substitution view suggests that compared with considering only one concept, considering both PC and CG would not significantly reduce bank loan prices.

  • The complementary view suggests that considering not only one but both concepts increases the loan term benefits.


Our contributions

<Our contributions>

  • We add to the increasing literature on CG and PC, given that earlier studies focus only on the individual concepts.

  • Our discussion focuses more on the interaction of CG and PC when banks provide benefits in making loans.

  • This study also relates to the perception of bankers on the “contributions” of CG or PC when processing loans.


Our contributions1

<Our contributions>

  • Our results have strong policy implications.

  • In a country where CG is stressed,

    the influence of PC on the loan contract may be insignificant.

  • Accordingly, governments could minimize political influence by stressing CG.


Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

2.The data


Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

Data

  • 1. Data Sources of Bank Loan Contracts

  • TEJ bank loan database

  • Final sample that contains 8,774 firm-year observations with 758 individual firms involved in 71,069 bank loan contracts.

  • 2. CG variables are also collected from the

  • TEJ database


Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

Data

  • Political connections Measures

  •  Hand-collected from various media, websites, and other sources.

  • The background of all top managers in each listed firm was traced to identify their connections with the government.


Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

Data

  • Our PC involves two measures.

  • 1. political party tendency:

  • Ex: top managers who served as central committee members of the two political parties

  • 2. political appointment:

  • Ex: top managers were either appointed as government officials or served as CEOs, general managers, or board directors in government-owned enterprises from 1997 to 2009.

  • The numbers of PC and Non-PC firms are 131 (17.28%) and 627 (82.72%) respectively.


Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

3.Empirical Results


Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

In Panel C, politically connected firms account for 30% of the bank loan sample.


Hypothesis 1a better governed firms could obtain better treatments in bank loan prices

Hypothesis 1a: Better-governed firms could obtain better treatments in bank loan prices.

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Hypothesis 1a better governed firms could obtain better treatments in bank loan prices1

Hypothesis 1a:Better-governed firms could obtain better treatments in bank loan prices.

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Hypothesis 1b firms with stronger pcs could similarly obtain better treatments in bank loan prices

Hypothesis 1b: Firms with stronger PCs could similarly obtain better treatments in bank loan prices.

25


Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

Hypothesis 1b: Firms with stronger PCs could similarly obtain better treatments in bank loan prices.Table 5. Political connections and bank loan price

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Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

Hypothesis 2: The substitution view suggests PC firms have poorer governance, The complementary view suggests that they have better governance. Table 6. Descriptive statistics: PC firms in different corporategovernance types

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Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

Hypothesis 2: The substitution view suggests PC firms have poorer governance, The complementary view suggests that they have better governance. Table 7. Differences in descriptive statistics: PC and non-PC firms

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Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

Hypothesis 2:The substitution view suggests PC firms have poorer governance, The complementary view suggests that they have better governance.

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Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

Hypothesis 2: The substitution view suggests PC firms have poorer governance, The complementary view suggests that they have better governance. Table 8. Corporate governance in politically connected firms

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Hypothesis 3

Hypothesis 3:

  • The substitution view suggests that compared with considering only one concept, considering both PC and CGwould not significantly reduce bank loan prices.

  • strong CG + strong PC >>>

    favorable terms decrease

  • The complementary view suggests that considering not only one but both concepts increases the loan term benefits.

  • strong CG + strong PC >>>

    favorable terms increase


Hypothesis 31

Hypothesis 3:

32


Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

Hypothesis 3: The substitution view :strong CG + strong PC >>>favorable terms decrease The complementary view: >>>favorable terms increaseTable 9. Corporate governance vs. political connection: Bank loan price

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Do strong corporate governance firms still require political connection chung hua shen yu chun wang chih yung lin

4.Conclusion


Conclusion

We address the following questions:

Do firms with strong CG still require PCs?

Are CG and PC substitution or complement?

we also discuss whether better-governed or politically connected firms acquire benefits in bank loan contracts.

Conclusion


Conclusion1

1. strong CG >>favorable loan rates

strong PC >>favorable loan rates

2. PC firms tend to have poor CG.

3. strong CG + strong PC >>>

favorable terms decrease

[supporting the substitution effect]

4. this result may also explain why firms with strong CG do not require PC.

Conclusion


Thank you comments are welcome

Thank you !Comments are welcome.


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