Political connections, bailout in financial markets and firm value
The paper shows that politically motivated interventions in the financial market in the form of bailing out borrowing firms reduce banks’ incentives to gather valuable information about firms’ projects. This loss of information is a hidden cost which adversely affects firm value. Firms invest resour...
| Main Authors: | , , |
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| Format: | Article |
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Elsevier
2016
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| Online Access: | https://eprints.nottingham.ac.uk/40414/ |
| _version_ | 1848796050843762688 |
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| author | Banerji, Sanjay Duygun, Meryem Shaban, Mohamed |
| author_facet | Banerji, Sanjay Duygun, Meryem Shaban, Mohamed |
| author_sort | Banerji, Sanjay |
| building | Nottingham Research Data Repository |
| collection | Online Access |
| description | The paper shows that politically motivated interventions in the financial market in the form of bailing out borrowing firms reduce banks’ incentives to gather valuable information about firms’ projects. This loss of information is a hidden cost which adversely affects firm value. Firms invest resources and pay a premium to politically connected persons (BOD or other personnel). Such connections serve the twin purposes of hedging and enhancement of the value of collateral pledged against bank loans. Feeling secured, banks lose incentives to monitor borrowing firms. Thus, wealth effect of bailout from political connection is partially offset by the losses of valuable information brought about by bank lending. In equilibrium, the trade-off from gains out of political connections and costs due to losses from information-based bank monitoring depend on (i) the country’s disclosure laws, (ii) the political environment, (iii) the premium paid to form connections, and (iv) the state of the economy. |
| first_indexed | 2025-11-14T19:41:49Z |
| format | Article |
| id | nottingham-40414 |
| institution | University of Nottingham Malaysia Campus |
| institution_category | Local University |
| last_indexed | 2025-11-14T19:41:49Z |
| publishDate | 2016 |
| publisher | Elsevier |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | nottingham-404142020-05-04T18:24:51Z https://eprints.nottingham.ac.uk/40414/ Political connections, bailout in financial markets and firm value Banerji, Sanjay Duygun, Meryem Shaban, Mohamed The paper shows that politically motivated interventions in the financial market in the form of bailing out borrowing firms reduce banks’ incentives to gather valuable information about firms’ projects. This loss of information is a hidden cost which adversely affects firm value. Firms invest resources and pay a premium to politically connected persons (BOD or other personnel). Such connections serve the twin purposes of hedging and enhancement of the value of collateral pledged against bank loans. Feeling secured, banks lose incentives to monitor borrowing firms. Thus, wealth effect of bailout from political connection is partially offset by the losses of valuable information brought about by bank lending. In equilibrium, the trade-off from gains out of political connections and costs due to losses from information-based bank monitoring depend on (i) the country’s disclosure laws, (ii) the political environment, (iii) the premium paid to form connections, and (iv) the state of the economy. Elsevier 2016-12-21 Article PeerReviewed Banerji, Sanjay, Duygun, Meryem and Shaban, Mohamed (2016) Political connections, bailout in financial markets and firm value. Journal of Corporate Finance . ISSN 0929-1199 (In Press) Bank monitoring information production Bailout political connection http://www.sciencedirect.com/science/article/pii/S0929119916303492 doi:10.1016/j.jcorpfin.2016.12.001 doi:10.1016/j.jcorpfin.2016.12.001 |
| spellingShingle | Bank monitoring information production Bailout political connection Banerji, Sanjay Duygun, Meryem Shaban, Mohamed Political connections, bailout in financial markets and firm value |
| title | Political connections, bailout in financial markets and firm value |
| title_full | Political connections, bailout in financial markets and firm value |
| title_fullStr | Political connections, bailout in financial markets and firm value |
| title_full_unstemmed | Political connections, bailout in financial markets and firm value |
| title_short | Political connections, bailout in financial markets and firm value |
| title_sort | political connections, bailout in financial markets and firm value |
| topic | Bank monitoring information production Bailout political connection |
| url | https://eprints.nottingham.ac.uk/40414/ https://eprints.nottingham.ac.uk/40414/ https://eprints.nottingham.ac.uk/40414/ |