Wednesday, September 22, 2010

Empirical Study: Cronyism Pays

This won't come as shocking news to regular EPJ readers but a new study published in  the journal Financial Management shows that politically-connected firms gain an edge.

Mara Faccio, Hanna Chair in Entrepreneurship & Associate Professor of Finance, Krannert School of Management, Purdue University has conducted a study of several thousand firms from forty-seven countries and reached those results.

She found that, "Politically connected firms have higher leverage (in the form of preferential loans), pay lower taxes, have regulatory protection, are eligible for government aid, and have stronger market power. They differ more dramatically from their peers when their political links are stronger, and in more corrupt countries, although these characteristics can be observed worldwide."

Faccio the connection holds in both emerging and developed countries. Faccio, "My study affects day-to-day corporate decisions. It is unfortunate that firms with no political ties appear to be at a disadvantage."

The next study that needs to be undertaken is to see if this advantage of the politically connected always translates into an advantage for shareholders in publicly traded companies. I suspect it doesn't in most cases. There are exceptions, e.g., Goldman Sachs stock. But I suspect that managements that seek to curry favor with government and rip off citizens in the country will generally tend to also rip off shareholders with higher salaries and more perks.

(Thanks to TG)

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