Politically connected Indian firms with higher cash holdings achieve substantially better valuations over time.
Authors
Kousik Ganguly, Vinod Gupta School of Management, Indian Institute of Technology (IIT) Kharagpur, Kharagpur, West Bengal, India; Jindal Global Law School, O.P. Jindal Global University, Sonipat, Haryana, India.
Ajay Kumar Mishra, Vinod Gupta School of Management, Indian Institute of Technology (IIT) Kharagpur, Kharagpur, West Bengal, India.
Katarzyna Platt, School of Business, SUNY Old Westbury, Old Westbury, New York, USA.
Summary
This article examines the influence of political proximity and cash-holding behavior of Indian firms on firm value and operating performance. Using a robust data set of political donations and connections for listed Indian firms around three general elections in India from 2009 to 2019, we find that firms with political connections show higher performance than their nonconnected peers.
We also observe that politically connected Indian firms with higher cash holdings achieve substantially better valuations over time. Our results are robust and consistent after controlling for various factors.
The article coincides with the introduction of electoral bonds through an amendment in Finance Bill 2017, which formalized the corporate financing of political parties and will likely strengthen the corporate-political linkages via more substantial donations. Overall, the article introduces political proximity/connection as a new indirect factor influencing firm performance.
Published in: Emerging Markets Finance and Trade
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