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We study the effect of political connection (PC) on company value in an environment where low PC is due to better institutions and not confounded by favorable social/cultural factors. We find that in Singapore, the only country that fits this description, PC in general adds little to the value of a company However, in industries that are subject to more stringent government regulations, PC appears to be somewhat important. Robustness checks show that alternative PC variables give rise to similar results, and the addition of control variables do not drastically change the findings. Politically connected firms have higher managerial ownership and tend to be smaller than non-PC firms, rendering them more susceptible to poorer governance practices. We show that the presence of politically connected directors somewhat neutralizes such potential negative effects. PC firms are associated with good governance practices such as nonduality in their chairman and chief executive officer positions and fewer executive directors.
Keywords: political connection, corporate governance, firm value, Singapore
JEL codes: G32, G34, 053
(ProQuest: ... denotes formulae omitted.)
L Introduction
While the value of political connection to firms has received considerable research interest (Goldman, Rocholl, and So 2009; Imai 2006; Khwaja and Mian 2004; Ang and Boyer 2007), the question of whether political connection enhances firm value has mixed findings.1 When the value of political connection is found to be high, they are often in countries with higher levels of official corruption. V\fe do not know whether political connection is as valuable in the absence of political corruption, the question being, is political corruption a precondition for political connection to be valuable? To test this hypothesis, we examine the impact of politically connected directors on the value of firms operating in an environment where the perceived level of corruption is comparatively low.2
Singapore was selected for the study because it is unique among low corruption countries. Unlike other low corruption countries where the results may be attributable to shared social and/or cultural factors with neighboring countries, Singapore has a distinctive need for much stronger institutions as it is surrounded by countries that are perceived to be inherently more corrupt. For example, the 2010 edition of the global corruption perceptions index released by Transparency International lists Denmark, New Zealand, and Singapore...