Transactional and Relational Approaches to Political Connections and the Cost of Debt

Taufiq Arifin, Iftekhar Hasan, Rezaul Kabir

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Abstract

This paper examines the economic effects of a firm’s approach to developing and maintaining political connections. Specifically, we investigate whether lenders favor transactional connection as opposed to relational connection. By tracing firms in a politically volatile emerging democracy in Indonesia, we find that firms following a transactional political connection strategy experience a relatively lower cost of debt than those with a relational strategy. The effect is more pronounced for firms facing high financial distress. The finding is robust to cost of bank loans and a variety of regression methods. Overall, the evidence suggests that in times of frequently changing political regimes, firms benefit from a transactional relationship with politicians as it enables to update connection with the government in power. Relational connection is valuable for a firm only when the political regime connected with it gains power.
Original languageEnglish
Number of pages39
JournalJournal of corporate finance
Publication statusAccepted/In press - 19 Oct 2020

Keywords

  • Political connection
  • Cost of debt
  • corporate governance

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