Political connection, corporate governance and firms' performance

Abstract

This study investigates the effects of political connection and corporate governance level on the performances of the listed firms in SET during 1999-2008. It also proposes the systematic method for matching politically connected firms and classifying them into specific categories, i.e., direct, strongly indirect and weakly indirect connection. This method allows researchers studying on political connection to widen the definition of politically connected firms and be able to easily switch the groups of qualified samples across definitions. The results indicate that the firms connecting with the cabinet members can significantly outperform the markets while the firms connecting with members of the House of Representatives do not. And, when the governance level and the proxy of private information flow are controlled, the outperformance of cabinet connected firms still persists. Moreover, the result from the study points out that the firms having higher corporate governance level have better performance, especially in term of Tobin’s Q ratio. Even though, the firms having higher private information flow do not outperform the firms with lower one. This research also studies the effect of the coup in 2006 on the stock returns of politically connected firms. The result from the event study suggests that the firms connecting with the overthrown cabinet members received significantly negative effect from the happening of the coup while the firms connecting with representatives from the opposition parties received the positive effect. By using the regression model on buy-and-hold stock returns, the firms direct or strongly indirect connecting with the overthrown cabinet members receive the significantly negative effect, likewise the firms connecting with the politicians assuming power from the coup.