Banerji, S., Duygun, M. and Shaban, M. orcid.org/0000-0002-6939-113X (2017) Political connections, bailout in financial markets and firm value. Journal of Corporate Finance. ISSN 0929-1199
Abstract
The paper shows that politically motivated interventions in the financial market in the form of bailing out borrowing firms reduce banks' incentives to gather valuable information about firms' projects. This loss of information is a hidden cost which adversely affects firm value. Firms invest resources and pay a premium to politically connected persons (BOD or other personnel). Such connections serve the twin purposes of hedging and enhancement of the value of collateral pledged against bank loans. Feeling secured, banks lose incentives to monitor borrowing firms. Thus, wealth effect of bailout from political connection is partially offset by the losses of valuable information brought about by bank lending. In equilibrium, the trade-off from gains out of political connections and costs due to losses from information-based bank monitoring depend on (i) the country's disclosure laws, (ii) the political environment, (iii) the premium paid to form connections, and (iv) the state of the economy.
Metadata
Item Type: | Article |
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Authors/Creators: |
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Copyright, Publisher and Additional Information: | © 2017 Elsevier. This is an author produced version of a paper subsequently published in Journal of Corporate Finance. Uploaded in accordance with the publisher's self-archiving policy. Article available under the terms of the CC-BY-NC-ND licence (https://creativecommons.org/licenses/by-nc-nd/4.0/) |
Keywords: | Bank monitoring; information production; Bailout; political connection |
Dates: |
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Institution: | The University of Sheffield |
Academic Units: | The University of Sheffield > Faculty of Social Sciences (Sheffield) > Management School (Sheffield) |
Depositing User: | Symplectic Sheffield |
Date Deposited: | 23 Feb 2017 16:43 |
Last Modified: | 22 Jun 2018 00:38 |
Published Version: | http://doi.org/10.1016/j.jcorpfin.2016.12.001 |
Status: | Published |
Publisher: | Elsevier |
Refereed: | Yes |
Identification Number: | 10.1016/j.jcorpfin.2016.12.001 |
Open Archives Initiative ID (OAI ID): | oai:eprints.whiterose.ac.uk:112613 |