Rent Seeking and Corporate Finance - CUHK Business School ...

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advantage of obtaining access to debt, in particular long-term debt. The debt financingadvantage disappears when the connections are broken due to the arrest of the bureaucrats.To examine whether any of the lost financing advantage is reflected in lower firm value, weperform an event study in which we estimate the cumulative abnormal stock returns (CARs) ofthe firms around the initial public release of the corruption news.We find that CARs, measuredwithin various event windows, are positively related to change in leverage around the corruptionevents. The event study results suggest that the stock markets discount the value of the firmswhose financial leverages reduce (or do not increase as much as other firms) around thecorruption events. In addition to the event study that focuses on short-term performance, wealso examine the associations between time-serial changes in financial policy and long-termperformance of the sample firms. To better isolate any short-term impacts of the corruptionscandals and hence to further mitigate potential endogeneity problem, we examine changes infinancing/performance measures over a seven-year window centered by the corruption events,and find consistent positive relations between the firms’ financing capacity and performance.Finally, we attempt to address the question of whether the rent seeking activities and thecapital allocation efficiency of China’s financial system can co-exist, in that more efficient firmsare more likely to pay bribes or build connections to secure their access to capital. We areunable to find such evidence.The overall empirical evidence suggests that public sector governance affects corporatefinancing behaviors. It corroborates previous cross-country studies pointing to the importance ofcountry institutional factors in shaping corporate financing decisions.In particular,Demirguc-Kunt and Maksimovic (1999) report that companies in countries with higher qualitylegal systems and property rights enforcement have longer debt maturity. Fan, Titman, and4
Twite (2005) report that corporate capital structure and debt maturity decisions are closelyrelated to a country’s tax system, legal system, and corruption level.This study is built on an economic literature showing that rent seeking importantly explainsfirm behaviors and economic growth (Shleifer and Vishny, 1994, 1998; and many others).Several recent papers report that a significant part of firm value comes from corruption and rentseeking activities (Fisman, 2001; Johnson and Mitton, 2003; Ramalho, 2003; Faccio, 2006). Ourfinding that the rent seeking factor influences the allocation of financial capital among firms isrelated to two recent studies of the Chinese financial system suggesting that China’s institutionaland regulatory environments support relationship based financing and corporate governance(Allen, Qian, and Qian, 2005a, b).Our evidence corroborates with Johnson, McMillan, and Woodruff (2002) and Acemogluand Johnson (2005) showing that the risk of expropriation by governments is a fundamentalfactor that shapes the financial development of a country. Durnev, Li, Morck, and Yeung(2004) show that the low efficiency of some transition economies’ capital markets indisseminating firm-specific information is closely related to weak property rights protection andpoor government quality. Our study complements several studies that examine the roles ofpolitical connection in firm financing behaviors (Charumilind, Kali, and Wiwattanakantang,forthcoming; Leuz and Oberholzer-Gee, 2006). In particular, Khawaja and Mian (2005) reportthat politically connected firms in Pakistan receive abnormal lending from government banksand suffer from abnormal default rates. Dinc (2005) in a cross-country study reports thatgovernment owned banks tend to increase their lending in election years relative to privatebanks. Siegel (2005) reports that Korean firms connected to politicians gain better access to keyoutside resources through cross-border alliances.Faccio, Masulis, and McConnell5
Page 1 and 2: Rent Seeking and Corporate Finance:
Page 3: politically connected or bribing fi
Page 8: three policy banks 4 , ten national
Page 11 and 12: company’s senior managers, direct
Page 13: cases, we identify a matching firm
Page 17 and 18: events (Figure 3.2). 15Overall, the
Page 19 and 20: and 8), while significantly positiv
Page 22 and 23: 4.1. The event studyTo examine whet
Page 24: the Corrupt dummy as defined before
Page 27 and 28: non-event firms. 21If the event fir
Page 29 and 30: 6. ConclusionsWe have examined the
Page 31 and 32: References:Acemoglu, D., and Johnso
Page 33 and 34: MacKay, P., and Phillips, G.M., 200
Page 35 and 36: Appendix 2Summary of the corruption
Page 37 and 38: imprisonment in 1998.Source: Commun
Page 39 and 40: Appendix 3Additional Robustness Tes
Page 41 and 42: Figure 1Leverage and CorruptionFigu
Page 43 and 44: Figure 3Long-term leverage and Corr
Page 45 and 46: Table 2Capital Structure, Debt Matu
Page 47 and 48: Table 3Differences in the Change in
Page 49 and 50: Table 4Fixed-Effect Regression Resu
Page 51 and 52: Table 5Fixed-effect Regression Resu
Page 53 and 54: Table 6Changes in Leverage and Stoc
Page 55 and 56:
Table 7 (Continued)Panel B. Sub-sam
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