Abstract
Purpose: This study aims to investigate the relationship between political connections, financing decisions and cash holding.
Design/methodology/approach: Based on historical data from 181 active non-financial firms listed on Gulf Cooperation Council (GCC) Stock Exchange Markets during the period of 2009–2016, this study uses ordinary least squares (OLS) and dynamic system-generalized method of moments (GMM) to test the research hypotheses. The final data set comprises a total of 1448 firm-year observations from 10 major non-financial industry classifications.
Findings: This study finds a positive relationship between political connections and each of internal financing proxied by retained earnings ratio and external financing proxied by short-term debt to total assets and long-term debt to total asset. The findings also show a positive relationship between political connections and cash holding.
Practical implications: The findings of the study provide a better understanding of the role of politically connected directors in financing decisions and cash holding in the GCC. Investors can consider the presence of royal family members in the board of directors when making investment decision. Policymakers are encouraged to develop more effective policies that encourage listed firms to provide information on the political positions of the board of directors, managers and major shareholders/owners of companies.
Originality/value: This study contributes to the literature by providing empirical evidence on the relationship between political connections and financing decisions by focusing on the GCC region. This study also highlights that boards in connected firms in the GCC have lower monitoring role owing to political interventions and that connected firms face higher agency problems as they have weak governance and boards compared with non-connected firms.
Design/methodology/approach: Based on historical data from 181 active non-financial firms listed on Gulf Cooperation Council (GCC) Stock Exchange Markets during the period of 2009–2016, this study uses ordinary least squares (OLS) and dynamic system-generalized method of moments (GMM) to test the research hypotheses. The final data set comprises a total of 1448 firm-year observations from 10 major non-financial industry classifications.
Findings: This study finds a positive relationship between political connections and each of internal financing proxied by retained earnings ratio and external financing proxied by short-term debt to total assets and long-term debt to total asset. The findings also show a positive relationship between political connections and cash holding.
Practical implications: The findings of the study provide a better understanding of the role of politically connected directors in financing decisions and cash holding in the GCC. Investors can consider the presence of royal family members in the board of directors when making investment decision. Policymakers are encouraged to develop more effective policies that encourage listed firms to provide information on the political positions of the board of directors, managers and major shareholders/owners of companies.
Originality/value: This study contributes to the literature by providing empirical evidence on the relationship between political connections and financing decisions by focusing on the GCC region. This study also highlights that boards in connected firms in the GCC have lower monitoring role owing to political interventions and that connected firms face higher agency problems as they have weak governance and boards compared with non-connected firms.
| Original language | English |
|---|---|
| Number of pages | 30 |
| Journal | Journal of Financial Reporting and Accounting |
| Early online date | 3 Jun 2022 |
| DOIs | |
| Publication status | Early online - 3 Jun 2022 |
Keywords
- political connection
- financing decisions
- cash holding
- royal family
- Gulf Cooperation Council