Selected Journal Publications


How Political Connections Affect Voluntary Disclosures by Firms

Political Connections and Voluntary Disclosure: Evidence from around the World
HUNG, Mingyi | LI, Siqi
Journal of International Business Studies

Political connections have been associated with various benefits to firms and shareholders around the world – from better access to banking finance, to lower tax barriers, to lax regulatory enforcement, to receipt of government contracts and support. But how do these connections affect a firm’s willingness to voluntarily disclose information?

That question is of interest because a growing body of research has shown that corporate transparency plays an important role in firm efficiency and growth. Firms generally have an incentive to voluntarily disclose information when there are greater capital market incentives and higher litigation risk. But Mingyi Hung, Yongtae Kim and Siqi Li argue that when a firm is politically-connected, these incentives are reduced.

“Compared to non-connected firms, connected firms have better access to credit and obtain privileged loans from banks that are influenced by politicians,” they said. “As a result, they have a lesser need to raise capital from the public and so have lower disclosure incentives to reduce the cost of capital. In addition, connected firms enjoy political protection and lower litigation risk and consequently have lower disclosure incentives to avoid lawsuits.”

The authors confirm that this is the case in the first study of its kind to look at voluntary disclosure and political connections. They focused on a sample of 208 connected firms in 24 countries from 2002-04, and 11,466 unconnected firms, using management forecasts as a measure of voluntary disclosure. Firms were considered to be politically-connected if at least one of their major shareholders (controlling more than 10 per cent of votes) or senior directors was a member of parliament, minister or head of state, or closely related to a top government official.

Their significant finding was that connected firms issued 77.4 per cent fewer management forecasts in a given year, compared to non-connected firms. The finding held up to a number of tests, such as alternative measures of voluntary disclosure, state ownership and alternative samples.

They also looked at what happened to voluntary disclosure after a political tie was weakened – in this case, when an election resulted in a change of power. Connected firms were much more likely to increase the frequency of their management forecasts after such an election than were non-connected firms. However, if the election maintained the power status quo, the frequency of forecasts stayed the same for connected firms.

Moreover, “the increase in the number of management forecasts following realigning elections was present only among firms connected with government officials or members of parliament [and not their relatives]. This provides further support that the increases in forecasts is due to the elections damaging the firms’ political connections,” they said.

The authors also found that the nature of the forecasts from connected firms changed after realigning elections. They included more additional line items and accompanying explanations and were less specific in their forecasts, which reflected their new uncertainty.

Tests were also conducted that confirmed capital market incentives, litigation risk and proprietary costs influenced the difference in voluntary disclosure between connected versus non-connected firms. Connected firms disclosed less in places where there was a more efficient stock market, more litigious industry and more abundant proprietary information. These factors were shown to be more important in firm disclosure decisions than corruption or political rent-seeking.

“Our paper provides direct evidence that political connections affect firms’ transparency by examining voluntary disclosure, and sheds light on the channels through which this happens. The results suggest that weaker capital market incentives and lower litigation risk reduce connected firms’ disclosure incentives. This finding adds to our understanding of how political forces shape global companies’ strategy for communicating with providers of capital,” they said.


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