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1. Introduction
Political connection is defined as the connectedness between a business and government or politicians that can benefit the business in several ways. Though politicians use subsidies to control firms, firms seek to influence politicians to gain privileges and protection via bribes (Shleifer and Vishny, 1994). Recent studies show that political connections benefit firms via preferential access to bank loans from public banks (Xu et al., 2013; Houston et al., 2013), minimizing external risk (Mitchell and Joseph, 2010) and alleviating litigation risk (Firth et al., 2011). Evidence of political connections affecting corporate outcomes and decision-making are found across the globe. For instance, Habib et al. (2017) show that Indonesian firms with government connections tend to engage more in earnings management to conceal their transactions. Li and Brodsgaard (2013) find that state-owned enterprises (SOEs) in China enjoy the Chinese government's SOE-favoritism policies that help boost SOEs' production. Saeed et al. (2015) indicate Pakistani connected firms' privilege in access to credit. Other international studies add evidence to the role of political connections in corporate strategies (Boubakri et al., 2008, 2012; Faccio, 2010; Al-Hadi et al., 2016).
The related literature classifies political connections into four categories: state-owned or government-linked via government's investments – GLI (Dewenter and Malatesta, 2001; Apriliyanti and Kristiansen, 2019; Aguilera et al., 2021); politically-connected directors – PCD (Faccio, 2010; Bliss and Gul, 2012): crony firms that connect via crony capitalists – CRO (Faccio, 2010; Boubakri et al., 2012): and businesses connected via family members of leading politicians – FAM (Fisman, 2001; Wong and Hooy, 2018). Despite studies in the literature have incorporated more than one type of political connection into their research, they employ a one-proxy-fits-all treatment to represent political connections in their research design (i.e. a dummy variable that equals one if a firm has any connectedness to the government or politicians and zero otherwise). This simple treatment can present a sample of firms with a fundamentally different characteristic from other firms. However, it does not reflect in-group heterogeneity between the radically different categories of politically connected firms. Therefore, the findings of empirical analysis using that proxy might bias toward the type of connection with most observations. However, there is an intriguing fact in the literature...