How Political Connections Affect Voluntary Disclosures by Firms

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Political connections have been associated with various benefits to firms and shareholders around the world – from better access to banking finance, to lower tax barriers, to lax regulatory enforcement, to receipt of government contracts and support. But how do these connections affect a firm’s willingness to voluntarily disclose information?

That question is of interest because a growing body of research has shown that corporate transparency plays an important role in firm efficiency and growth. Firms generally have an incentive to voluntarily disclose information when there are greater capital market incentives and higher litigation risk. But Mingyi Hung, Yongtae Kim and Siqi Li argue that when a firm is politically-connected, these incentives are reduced.

“Compared to non-connected firms, connected firms have better access to credit and obtain privileged loans from banks that are influenced by politicians,” they said. “As a result, they have a lesser need to raise capital from the public and so have lower disclosure incentives to reduce the cost of capital. In addition, connected firms enjoy political protection and lower litigation risk and consequently have lower disclosure incentives to avoid lawsuits.”

The authors confirm that this is the case in the first study of its kind to look at voluntary disclosure and political connections. They focused on a sample of 208 connected firms in 24 countries from 2002-04, and 11,466 unconnected firms, using management forecasts as a measure of voluntary disclosure. Firms were considered to be politically-connected if at least one of their major shareholders (controlling more than 10 per cent of votes) or senior directors was a member of parliament, minister or head of state, or closely related to a top government official.