Do different political connections affect firms' distress risk differently?
International Journal of Emerging Markets
ISSN: 1746-8809
Article publication date: 30 April 2021
Issue publication date: 24 February 2023
Abstract
Purpose
This paper investigates how different types of corporate political connection, including government-linked investment (GLI), former officials as politically-connected directors (PCD), cronyism (CRO) and government leaders' family ties (FAM), influence financial distress risk in Malaysian firms.
Design/methodology/approach
We separate political connections into four distinct categories and investigate their relationship with firm distress risk and compare the results with the one-size-fits-all treatment which is popular in the literature. We apply a battery of sensitivity test to ensure that our inferences are robust to a wide range of test specifications, endogeneity concern and sample selection methods.
Findings
The empirical results show that the effect of political connections on distress risk is strongly heterogeneous. GLI and PCD firms tend to have higher distress risk via increased risk-taking behaviors because of the different incentives of the connections, while this nexus does not directly exhibit in CRO and FAM firms. Further analyses reveal that CRO and FAM firms are more likely to venture into risky international diversification, thus indirectly amplifying their distress risk.
Originality/value
Our findings are novel and provide practical implications for financial analysts, investors and portfolio managers operating in the capital markets.
Keywords
Acknowledgements
The authors are grateful to the editors, Ilan Alon, Duc Khuong Nguyen, three anonymous reviewers, Nick Nguyen (Auckland University of Technology, Auckland, New Zealand), their colleagues at Lincoln University (Lincoln, New Zealand) and National Economics University (Hanoi, Vietnam) for their constructive comments and suggestions to the manuscript. The authors also thank Wai-Yan Wong and Chee-Wooi Hooy for providing the list of Malaysian non-connected firms from their study.
Funding: This research is funded by the National Economics University, Hanoi, Vietnam.
Citation
Nguyen, T.X., Hoang, K., Nguyen, C.C. and Bach, T.N. (2023), "Do different political connections affect firms' distress risk differently?", International Journal of Emerging Markets, Vol. 18 No. 2, pp. 376-398. https://doi.org/10.1108/IJOEM-08-2020-0874
Publisher
:Emerald Publishing Limited
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