Skip to main content
Disciplines
Automotive Business IT + Informatics Construction + Real Estate Electrical Engineering + Electronics Energy + Sustainability Insurance + Risk Finance + Banking Management + Leadership Marketing + Sales Mechanical Engineering + Materials
Events
DE
EN
Books
Journals
Topic Page
Marketing
Start single access now
Access for companies
EXTENDED SEARCH
Log in
Top
Review of Quantitative Finance and Accounting
Published in:

19-12-2023 | Original Research

The externality of politically connected directors’ resignations on peers’ cost of debt

Authors: Ting Liu, Shaoqing Kang, Lihong Wang

Published in: Review of Quantitative Finance and Accounting | Issue 3/2024

Log in

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

Using a sample of Chinese listed firms from the Shanghai and Shenzhen Stock Exchanges from 2012 to 2018, we investigate the externality of the forced resignations of politically connected independent directors on the cost of debt for non-connected peers. Exploiting an exogenous shock caused by the 18th decree, we find that when politically connected independent directors resign from a Chinese listed firm, non-connected peers within the same industry experience a decrease in the cost of debt. Moreover, the sensitivity analyses further show that the above externality is more prominent in a subsample of Chinese listed non-SOEs, and in a subsample of Chinese listed firms operating in more competitive industries as well as in less developed financial markets, indicating that the externality is conditional on ownership type, industry competition and financial market development. Finally, further analyses show that peers tend to issue new debt after the political connection is disrupted. We also find that when peers have a higher creditworthiness and resignation firms have a lower creditworthiness, peers enjoy a lower cost of debt after resignations. These findings suggest that the resignations have a positive externality on peers’ cost of debt due to the elimination of preferential treatment and an improved resource allocation efficiency.
previous article Audit committee equity incentives and stock price crash risk
next article Corporate investment decisions with switch flexibility, constraints, and path-dependency

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

inform now

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

inform now
Footnotes
1
Indeed, there are only 6 listed firms resigning politically independent directors in 2013. To exclude the possibility that our results are influenced by 6 resigning firms in 2013, we also regard the above 6 firms resigning politically connected independent directors as politically connected firms affected by the 18th decree in a robustness check. Our main conclusions are not affected.
 
2
Given that RES_FIN and REP_FIN represent changes in the directors’ background while GROWTH is a change form, we control their level form. Similarly, given that ΔAGE does not exhibit any change, we directly control AGE in our model.
 
3
To mitigate the concern that measurement error may confound our results, we use an alternative proxy for the cost of debt. Following extant literature (see also Gao et al. 2020), we adopt the cost of bond to capture the market rate of financing cost, which is measured as the difference between the annual yield to maturity on the firm’s outstanding traded bond and yield to maturity on a Treasury bond of comparable maturity. Similar to the main results, we find that non-connected peer firms enjoy a lower bond spread following the resignations.
 
4
As a robustness check, we further conduct a split-sample analysis according to whether the government has an influence over bank lending, and find that the coefficients of PEER_DUM and TREAT × POST are both significant across these subsamples with versus without a government influence. The results show that the externality of the disruption of political connection on peer firms’ cost of debt is not sensitive to lending institutions’ ownership type.
 
5
More exactly, financial-institutions activity is measured as the private sector credit to regional GDP; financial-institutions access is measured as the bank branches per 100,000 adults, and financial-institutions efficiency is measured as the accounting value of bank’s net interest revenues as a share of its assets. We aggregate the sub-indices into the final index by pooling together all series in a particular sub-index across all regions and all years to find the linear combination. Clearly, the aggregation is a weighted linear average of the underlying series, and a higher weight is given to a series that contributes more to the direction of common variation.
 
6
In addition, stock market investors in non-connected peers may also react positively to the resignations since peers can enjoy a favorable operating environment following resignations. Thereby, we examine the effect of the resignation on peers’ equity return. We find that the loss of political connections possessed by independent directors positively affect peers’ market reactions.
 
7
Earnings quality is measured as the absolute value of discretionary accruals computed from annual cross-sectional estimations of Jones model. Quality of information disclosure is measured as the score value for information disclosure of listed firms. Analyst following is equal to the average number of analysts making a forecast for firm’s earnings. Analyst earnings forecast is the absolute value of the forecast error multiplied by negative one, scaled by the stock price at the end of the prior fiscal year. Auditors is equal to one if the firm is audited by a BIG4, and zero otherwise.
 
8
Since the sample in the difference-in-difference analysis does not include the resignation firms, we thereby do not use this sample to examine whether the externality of resignation on peers’ cost of debt varies depending on the information transparency of peers and resignation firms.
 
Literature
Batta G, Sucre H, Weidenmier M (2014) Political connections and accounting quality under high expropriation risk. Eur Account Rev 23(4):485–517CrossRef
Booth JR, Deli DN (1999) On executives of financial institutions as outside directors. J Corp Finan 5(3):227–250CrossRef
Bradley D, Pantzalis C, Yuan X (2016) Policy risk, corporate political strategies, and the cost of debt. J Corp Finan 40:254–275CrossRef
Brandt L, Li H (2003) Bank discrimination in transition economies: ideology, information, or incentives? J Comp Econ 31(3):387–413CrossRef
Chen Y, Wang SS, Li W, Sun Q, Tong WH (2015) Institutional environment, firm ownership, and IPO first-day returns: evidence from China. J Corp Finan 32:150–168CrossRef
Chen YS, Shen CH, Lin CY (2014) The benefits of political connection: evidence from individual bank-loan contracts. J Financ Serv Res 45(3):287–305CrossRef
Chircop J, Fabrizi M, Malaspina P, Parbonetti A (2023) Anti-Mafia police actions, criminal firms, and peer firm tax avoidance. J Account Res 61(1):243–277CrossRef
Cooper EW, Uzun H (2015) Corporate social responsibility and the cost of debt. J Account Financ 15(8):11–30
Duarte J, Han X, Harford J, Young L (2008) Information asymmetry information dissemination and the effect of regulation FD on the cost of debt. J Financ Econ 87(1):24–44CrossRef
Feng X, Li W, Peng Y, Tan Y (2021) International trade friction and the cost of debt: evidence from China. Pac Basin Financ J 67:101550CrossRef
Fisman R (2001) Estimating the value of political connections. Am Econ Rev 91(4):1095–1102CrossRef
Gao H, He J, Li Y, Qu YY (2020) Family control and cost of debt: evidence from China. Pac Basin Financ J 60:101286CrossRef
Giannetti M, Liao GM, You JX, Yu XY (2021) The externalities of corruption: evidence from entrepreneurial firms in China. Rev Financ 25(3):629–667CrossRef
Giroud X, Mueller HM (2011) Corporate governance, product market competition, and equity prices. J Financ 66(2):563–600CrossRef
Hasan I, Hoi CK, Wu Q, Zhang H (2017) Social capital and debt contracting: Evidence from bank loans and public bonds. J Financ Quant Anal 52(3):1017–1047CrossRef
He Q, Xue C, Zhu C (2017) Financial development and patterns of industrial specialization: evidence from China. Rev Financ 21(4):1593–1638CrossRef
Hope OK, Yue H, Zhong Q (2020) China’s anti-corruption campaign and financial reporting quality. Contemp Account Res 37(2):1015–1043CrossRef
Hovakimian A, Opler T, Titman S (2001) The debt-equity choice. J Financ Quant Anal 36:1–24CrossRef
Hu Y, Wang CY, Xiao G, Zeng JY (2020) The agency cost of political connections: evidence from China’s file 18. Pac Basin Financ J 64:101426CrossRef
Huang Y, Pagano M, Panizza U (2020) Local crowding-out in China. J Financ 75(6):2855–2898CrossRef
Jiang F, Kim KA, Nofsinger JR, Zhu B (2015) Product market competition and corporate investment: evidence from China. J Corp Finan 35:196–210CrossRef
Jin Z, Yang Y, Zhang L (2021) Geographic proximity and cross-region merger and acquisitions: evidence from the opening of high-speed rail in China. Pac Basin Financ J 68:101592CrossRef
Klock MS, Mansi SA, Maxwell WF (2005) Does corporate governance matter to bondholders? J Financ Quant Anal 40:693–719CrossRef
Lambert R, Leuz C, Verrecchia RE (2007) Accounting information, disclosure, and the cost of capital. J Account Res 45(2):385–420CrossRef
Leary MT, Roberts MR (2014) Do peer firms affect corporate financial policy? J Financ 69(1):139–178CrossRef
Levinthal DA (2017) Resource allocation and firm boundaries. J Manag 43(8):2580–2587
Levinthal DA, Wu B (2010) Opportunity costs and non-scale free capabilities: profit maximization, corporate scope, and profit margins. Strateg Manag J 31(7):780–801CrossRef
Li H, Meng L, Wang Q, Zhou LA (2008) Political connections, financing and firm performance: evidence from Chinese private firms. J Dev Econ 87(2):283–299CrossRef
Li K, Yue H, Zhao LK (2009) Ownership institutions and capital structure: evidence from China. J Comp Econ 37(3):471–490CrossRef
Li QG, Liu QG, Ma SG, Tian GG (2019) Loan financing and investment in princeling-backed firms. Pac Basin Financ J 56:71–92CrossRef
Li X (2010) The impacts of product market competition on the quantity and quality of voluntary disclosures. Rev Acc Stud 15(3):663–711CrossRef
Liao G, Yao D, Hu Z (2020) The spatial effect of the efficiency of regional financial resource allocation from the perspective of internet finance: evidence from Chinese provinces. Emerg Mark Financ Trade 56(6):1211–1223CrossRef
Lin KJ, Tan J, Zhao L, Karim K (2015) In the name of charity: Political connections and strategic corporate social responsibility in a transition economy. J Corp Finan 32:327–346CrossRef
Lin Y, Liu Y, Chan KC (2021) Political connections and product market competition: effects and channels. Int Rev Econ Financ 76:801–816CrossRef
Liu T, Wang LH (2021) Do competitors benefit from the resignation of politically connected independent directors? Evid China Appl Econ 53(60):6999–7019CrossRef
Lummer SL, McConnell JJ (1989) Further evidence on the bank lending process and the capital-market response to bank loan agreements. J Financ Econ 25(1):99–122CrossRef
Modigliani F, Miller M (1958) The cost of debt corporation finance and the theory of investment. Am Econ Rev 48(3):261–297
Morck R, Yavuz MD, Yeung B (2011) Banking system control, capital allocation, and economy performance. J Financ Econ 100(2):264–283CrossRef
Murphy KM, Shleifer A, Vishny RW (1991) The allocation of talent: Implications for growth. Quart J Econ 106(2):503–530CrossRef
Nee V (1992) Organizational dynamics of market transition: hybrid forms, property rights, and mixed economy in China. Adm Sci Q 37:1–27CrossRef
Ni X, Yin S (2018) Shareholder litigation rights and the cost of debt: Evidence from derivative lawsuits. J Corp Finan 48:169–186CrossRef
Owusu A, Kwabi F, Ezeani E, Owusu-Mensah R (2022) CEO tenure and cost of debt. Rev Quant Financ Acc 59(2):507–544CrossRef
Pan X, Tian GG (2020) Bank work experience versus political connections: which matters for bank loan financing. Int Rev Financ 20(2):351–382CrossRef
Pittman JA, Fortin S (2004) Auditor choice and the cost of debt capital for newly public firms. J Account Econ 37(1):113–136CrossRef
Schweizer D, Walker T, Zhang A (2020) False hopes and blind beliefs: How political connections affect China’s corporate bond market. J Bank Finance 106008
Shen CH, Huang YL (2013) Effects of earnings management on bank cost of debt. Accounting & Finance 53(1):265–300CrossRef
Spiceland CP, Yang LL, Zhang JH (2016) Accounting quality debt covenant design and the cost of debt. Rev Quant Financ Acc 47:1271–1302CrossRef
Svirydzenka K (2016) Introducing a new broad-based index of financial development. International Monetary Fund.
Valta P (2012) Competition and the cost of debt. J Financ Econ 105(3):661–682CrossRef
Wang H, Qian C (2011) Corporate philanthropy and corporate financial performance: the roles of stakeholder response and political access. Acad Manag J 54(6):1159–1181CrossRef
Wurgler J (2000) Financial markets and the allocation of capital. J Financ Econ 58(1–2):187–214CrossRef
Zhang M, Liu YS, Xie L, Ye TT (2017) Does the cutoff of “red capital” raise a red flag? Political connections and stock price crash risk. North Am J Econ Finance 39:89–109CrossRef
Zhang WH, Mao XS, Liu KX (2018) Does interest rate liberalization reduce the cost of debt financing? J Financ Res 10:106–122 ((in Chinese))
Metadata
Title
The externality of politically connected directors’ resignations on peers’ cost of debt
Authors
Ting Liu
Shaoqing Kang
Lihong Wang
Publication date
19-12-2023
Publisher
Springer US
Published in
Review of Quantitative Finance and Accounting / Issue 3/2024
Print ISSN: 0924-865X
Electronic ISSN: 1573-7179
DOI
https://doi.org/10.1007/s11156-023-01232-6

Other articles of this Issue 3/2024

Effect of FinCredit on income inequality: the moderating role of financial inclusion

  • Original Research

Optimal dividend decisions with capital infusion in a dynamic nonterminal bankruptcy model

  • Original Research

Realized higher moments and trading activity

  • Original Research

Research note: An investigation of the relation between pre-IPO dividends and vendor sales

  • Original Research

The impact of economic policy uncertainty and inflation risk on corporate cash holdings

  • Open Access
  • Original Research

Breaking the Big Four brand’s halo effect precisely: evidence from the association between RMM coverage ratios and integrated audit effectiveness

  • Original Research

Premium Partner

    Image Credits