Investigating Political Relationships and Stock Losses
Investigating Political Relationships and Stock Losses
Conclusion and discussion
The benefits of PCs diminish over time (Faccio et al., 2006), and developing a business through leverage of PCs results in lower motivation and willingness to provide transparent financial information (Klein, 2002).
Our empirical results reveal that the crash risk of firms with more PCs is higher because of information asymmetry between investors and managers.
Furthermore, the study reveals that external supervision mechanisms can significantly affect the occurrence of self-interested behavior in managers of PCFs.
This study has some limitations. For example, PCs can be indirectly established through relationships that are not easy to identify directly.
To define the extent of PCs, our study determines whether a company’s top managers or directors have ever held a position in the government or a political party.
If the method of identifying PCs has affected the analysis results, it would be appealing to explore the implicit network relationship through interviews to determine the impact exerted on company value by politics in terms of business and social networks.
Introduction
This study examines whether the probability that a firm’s stock price will crash is affected by the firm’s degree of political connections (PCs).
The risk appertaining to a crash in the price of stock is an asymmetrical risk, especially downside risk; therefore, such a risk is a critical part of politics’ effect on firm performance (Li et al., 2017).
Compared with those with no PCs, firms with PCs have more severe agency
problems as well as more pronounced information asymmetry, and a politically connected firm (PCF) has a disclosure policy that is poorly regulated and has weak investor protection (Houcine, 2017).
Scholars have noted that when investors have less information than do
managers about a firm’s prospects, the managers hide bad news, leading to an overvaluation of firm performance and then a dramatic drop in stock price (Luo et al., 2016; Tee, 2018).
The history of Taiwan’s politico-economic development reveals that
managers have incentives to derive gains from their connections. Comprehending the crash risk when making investment decisions and managing risks is thus essential (Li et al., 2017).