THE JOURNAL OF FINANCE•VOL.LXI,NO.6•DECEMBER2006
Political Connections and Corporate Bailouts MARA FACCIO,RONALD W.MASULIS,and JOHN J.M C CONNELL∗
ABSTRACT
We analyze the likelihood of government bailouts of450politically connected firms
from35countries during1997–2002.Politically connected firms are significantly more
likely to be bailed out than similar nonconnected firms.Additionally,politically con-
nected firms are disproportionately more likely to be bailed out when the International
莫斯科没有眼泪Monetary Fund or the World Bank provides financial assistance to the firm’s home
government.Further,among bailed-out firms,those that are politically connected ex-
hibit significantly worse financial performance than their nonconnected peers at the回来我的爱吉他谱
郑中基演唱会time of and following the bailout.This evidence suggests that,at least in some coun-
tries,political connections influence the allocation of capital through the mechanism
of financial assistance when connected companies confront economic distress.
A NECDOTAL EVIDENCE INDICATES THAT,at least in some countries,politically con-nected firms have preferential access to debt financing.1Empirical evidence supports the anecdotal evidence:Chiu and Joh(2004),Cull and Xu(2005), Faccio(2003),Johnson and Mitton(2003),and Khwaja and Mian(2005)show that politically connected(but publicly traded)firms have higher leverage ra-tios than their nonconnected peers.This evidence begs the question as to what it is about politically connected firms that makes lenders more willing to extend credit to them.It could be that lenders receive direct economic support from the governments to which the firms are connected.Or,it could be that lenders are coerced into making economically questionable loans to politicians’friends. Or,it could be that lenders rely upon an implicit government guarantee that politically connected borrowers or lenders will be bailed out should they en-counter financial difficulties.For example,Hutchcroft(1998,p.138)describes how troubled banks that lent to Philippines President Marcos and his cronies ∗Faccio and Masulis are from Vanderbilt University.McConnell is from Purdue University.We thank Cliff Ball,Philip Bond,Art Durnev,Amar Gande,E.Han Kim,Rodolfo Martell,Raghu Rau,Paola Sapienza,Antoinette Schoar,Rob Stambaugh(the editor),Christine Windbic
hler,an anonymous referee,seminar participants at the9th Mitsui Life Symposium at the University of Michigan and at the5th Annual Law and Business Conference at the Vanderbilt Law School,and workshop participants at the University of North Carolina,Vanderbilt University,Wharton,and the World Bank for comments.We also thank David Offenberg,Marouan Selmi,Miroslava Straska, Maferima Toure,Brian Ward,and Li Zhang for research assistance.
1See,for example,Backman(1999),Calvi and Meurice(1999),Gay and Monnot(1999),Gomez and Jomo(1997),Financial Times,“Fiat—The Lex Column”(June26,2003),The New York Times,“Indonesia’s repo man:Eko Budianto has ordered corporate cronies from the Suharto regime to pay back the billions they owe Indonesian banks or he’ll seize their assets,even if it means enlisting the army to help him”(July31,1999).
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enjoyed important privileges,including“emergency loans and generous equity infusions from state banks.”Backman(1999)observes that one of the unfor-tunate by-products of international aid packages is that they facilitate such economic cronyism.
In this study,we undertake a systematic examination of the link between political connections and corporate bailouts.To do so,we study450politically connected firms in35countries over the period1997through2002,along with a set of matching firms.We address questions such as:Do political connections lead to preferential corporate bailouts?Are bailouts of politically connected firms more likely in countries that receive International Monetary Fund(IMF) or World Bank(WB)rescue packages?Is the financial performance of politically connected bailed-out firms different from that of nonconnected bailed-out firms? The answer to the first question is yes.After controlling for other factors, politically connected(but publicly traded)firms are more likely to be bailed out than are their nonconnected peers.With regard to the second question, both connected and nonconnected firms are more likely to be bailed out when their home government receives an IMF or WB assistance package than when it does not.Additionally,and consistent with the allegations of some critics, when the IMF or WB provides aid,politically connected firms are dispropor-tionately more likely to be bailed out by their home countries in comparison to their nonconnected peers.With regard to the third question,the answer is again yes.Among bailed-out firms,those that are politically connected exhibit significantly poorer operating performance than their nonconnected peers at the time of the bailout and over the following2years.Furthermore,consistent with prior empirical and anecdotal evidence,connected firms make greater use of debt financing than do their nonconnected peers.
The evidence that politically connected firms make greater use of leverage is subject to a number of possible interpretations.One possibility is that lenders are irrational.A second is that they are coerced into making poor loans to politically connected enterprises.A third is that lenders receive offsetting gov-ernment benefits for making such loans.Yet another possibility is that lenders factor into their lending decisions the likelihood that borrowers will be bailed out when they encounter economic distress,and thus lend more to politically connected firms who are,in turn,more likely to be bailed out than their non-connected peers.
The evidence that we present is consistent with the last interpretation. Specifically,politically connected firms borrow more than nonconnected firms, but they are also more likely to be bailed out by their home governments when they encounter economic turbulence.2Furthermore,lenders to connected firms appear to grant such firms greater leeway in that these firms have poorer op-erating performance just prior to the bailout than nonconnected firms that are 2The study on bailouts closest to ours is probably that of Brown and Dinc¸(2005),who investigate whether,in emerging markets,governments are more likely to bail out banks after elections.Their evidence is consistent with the hypothesis that governments tend to minimize the costs of political intervention before elections and,therefore,intervene with bailouts after elections.Their study does not investigate which specific companies are more likely to be bailed out.
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Political Connections and Corporate Bailouts2599 bailed out.They also have significantly greater leverage after their bailouts than nonconnected firms.While our evidence indicates that lenders are willing to lend more to connected borrowers because they can reasonably anticipate a future bailout of troubled loans to these borrowers,our data do not rule out the possibilities that lenders may also sometimes be pressured into making weak loans and/or that lenders may receive benefits for extending such loans. Tracing through to the ultimate beneficiaries of a bailout is difficult.At one level,creditors benefit because they are bailed out of troubled loans;however,if the bailout is priced ex ante,creditors will receive a fair return on their capital (on an average).At a deeper level,shareholders benefit because,if the bailout is priced ex ante,their firms are able to borrow at favorable terms,given their credit standing.Of course,politicians may be the ultimate net beneficiaries, because they are able to extract most or all of the rents from borrowers,lenders, and other stakeholders(Bertrand et al.(2004),Shleifer and Vishny(1994)).In this study,we are not able to identify the ultimate beneficiaries of this system of political connections and bailouts.
One issue that this paper does illuminate is one channel through which polit-ical connections affect corporate value.In particular,papers by Roberts(1990), Fisman(2001),and Faccio(2006)show that the equity value of politically con-nected firms can be affected by political events.This study shows that o
ne chan-nel through which political connections can influence firm value is corporate bailouts.For example,Fisman finds that share prices of Indonesian companies linked to President Suharto declined in response to bad news about the state of the president’s health.It is possible that the fluctuations in share prices were due,at least in part,to decreases in the probability of future bailouts that Suharto’s regime would have facilitated had the connected companies experi-enced future financial difficulties.
This study also adds to the literature that examines rent-seeking behav-ior in the public sector.Krueger(1974)argues that entrepreneurs spend time and money persuading government officials to grant them access to economic rents.At the aggregate level,she shows that these rents represent a signifi-cant percentage of a nation’s GDP in some developing countries.More recently, Stulz(2005)presents a model that explores the interaction between private benefits of control and the risk of government expropriation.He observes that entrenched managers with limited cash flow rights have greater incentives to seek rents in terms of preferential government policies.In one study of rent-seeking behavior by entrepreneurs,Morck,Stangeland,and Yeung(2000) study the political influence of billionaires across41countries.They uncover evidence that billionaire heirs are often successful in creating government-enforced barriers to competition by restricting access to capital.O
ur study contributes to this literature by exploring a specific mechanism through which economic agents,whether entrepreneurs,lenders,or the politicians themselves, may be able to use political influence to extract economic rents from the public sector.
The remainder of the paper is organized as follows.Section I presents the def-initions and data sources we use in assembling a sample of politically connected
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companies and a set of nonconnected matching firms.Section II describes our methodology for identifying corporate and country bailouts.Section III presents evidence on the determinants of corporate bailouts.Section IV analyzes the op-erating performance and financial leverage of bailed-out companies.Section V presents various sensitivity analyses in which we employ alternative specifi-cations of the sample to evaluate the robustness of the results.According to these analyses,our results on the relationship between political connections and bailouts are robust to the exclusion of particular countries,the exclusion of specific industries,and alternative definitions of connections and bailouts. We also determine that our results are not due to reverse causality:that is, recently established connections do not lead to more bailouts than do long-term connections.Finally,
we show that the results are not due to a media bias in reporting bailouts of connected firms.Section VI provides commentary and conclusions.
I.Identification of Politically Connected Firms
A.Political Connections Defined
To address the questions concerning corporate bailouts,we begin with the set of politically connected firms described in Faccio(2006).From this database, we extract all firms identified as being politically connected as of January1, 1997.We require that the connection be in place prior to our period of analysis, so as to avoid cases wherein the connection was established coincident with or subsequent to the bailout.Thus,a company is defined as politically connected if at least one of its top officers(defined as the company’s chief executive offi-cer,chairman of the board(COB),president,vice-president,or secretary of the board)or a large shareholder(defined as anyone controlling at least10%of the company’s voting shares)was head of ,president,king,or prime min-ister),a government minister(as defined below),or a member of the national parliament,as of the beginning of1997.For example,Italian senator Giovanni Agnelli was COB of Instituto Finanziario Industriale(IFI),the holding com-pany of the Fiat group;thus,we classify I
FI as connected with a member of parliament through a top officer.Mr.Agnelli also held in excess of10%of the voting stocks of17Italian publicly traded companies,including IFI,IFIL,Fiat, and Toro Assicurazioni.We define each of these companies as connected with a member of parliament through share ownership by a large shareholder.Like-wise,as of1997,Russia’s Prime Minister Viktor Chernomyrdin held in excess of10%of the outstanding voting stock of Gazprom RAO.Thus,we define this company as connected with a head of state through his share ownership.Each of the above examples can be thought of as“direct”connections.
We identify a second category of connections,as“indirect connections.”These can come about in one of three ways.First,we classify a company as indirectly connected if a relative with the same last name as a head of state or minister is a top officer or a large shareholder,as defined above,as of1997.For ex-ample,Malaysian Prime Minister Mahathir’s middle son,Mokhzani Mahathir,
Political Connections and Corporate Bailouts2601 is the COB of Konsortium Perkapalan Bhd,so that we classify Konsortium as indirectly connected with a head of state through a top executive.Second, we classify a company as indirectly connected when a top executive or a large shareholder has been described by The Economist,Forbes,or Fortune as hav-ing a“friendship”with a head of state,government minister,or member of parliament during1997.Third,we classify a company as indir
ectly connected if a prior study identifies such a relationship as having been in place prior to January1,1997.Such prior studies include Agrawal and Knoeber(2001)for the United States;Backman(1999)for Asia;Gomez and Jomo(1997)and Johnson and Mitton(2003)for Malaysia;and Fisman(2001)for Indonesia.In total,these prior studies identify96politically connected firms.
alligator skyB.Data Sources for Political Connections
The data we use to identify political connections come from a variety of pub-licly available sources.We obtain names of heads of state,members of parlia-ment,and government ministers from the Chiefs of State and Cabinet Members of Foreign Governments(U.S.Central Intelligence Agency,1997)and the official web site of each country’s government and/or parliament(Appendix A,Panels A and B).We then cross-reference names of these persons with the names of the top executives(as defined above)of the20,202publicly traded companies covered in Worldscope as of1997.For companies covered by Worldscope,but where executives’names are missing,we collect names from Extel,the com-pany’s web site,or Lexis-Nexis.3The starting points for identifying the names of large shareholders are Claessens et al.(2000)for East Asian countries and Faccio and Lang(2002)for western European countries.We supplement these data for countries or companies n
邓健泓ot covered by the above sources with lists pub-lished by each country’s stock exchange or supervisory authority as detailed in Appendix A,Panel C,and with data from Worldscope and Extel.To determine whether a top executive or a large shareholder with the same last name as a head of state or minister is a relative,we search Lexis-Nexis for evidence of a family relationship.If Lexis-Nexis identifies the parties as related,we include the observation as an indirect connection.
The search covers47countries and identifies458politically connected com-panies in35countries.From this sample,we exclude eight companies whose connections are with foreign politicians(because we are interested in home-country connections,which are most likely to lead to home-country bailouts), leaving450politically connected companies.
Undoubtedly,this search procedure overlooks some instances of politically powerful connections,and in other cases it gives credit to political connections that are less powerful than they might appear.More importantly,we believe that,to the extent that this procedure leads to a sample bias,the bias is likely to understate the importance of political connections.
3Worldscope does not provide executives’names for less than10%of the firms in our sample.
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