Abstract
Using a unique firm-level dataset for the manufacturing sector in Indonesia, we examine how firms’ political connections affect their access to finance and performance. We determine individual firm's political connections by identifying whether the government owns shares in the firm, whether politicians are on its board of directors, and whether highly-ranked managers personally know any politician. Although several studies have examined effects of political connections on firms financing and performance, we contribute to the literature by distinguishing between large firms and small and medium enterprises (SMEs), between the loan approval and amount setting processes, and between formal and informal political connections. We find that politically connected firms are more likely to be able to borrow from state-owned banks. Moreover, being connected to the government raises the probability that a firm can receive the full loan amount it applied for. The improvement in access to finance from political connections is more prominent for SMEs than for large firms. Furthermore, such improvement mostly comes from personal connections with politicians rather than more formal connections measured by the government ownership or politicians on the board of directors. Finally, we examine the effect of political connected lending on allocative efficiency of capital and find weak evidence that scarce financial resources are likely channeled by state-owned banks to politically connected but less productive firms.
| Original language | English |
|---|---|
| Pages (from-to) | 45-55 |
| Number of pages | 11 |
| Journal | Journal of Asian Economics |
| Volume | 52 |
| DOIs | |
| Publication status | Published - 2017 Oct 1 |
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Keywords
- Credit constraints
- Indonesia
- Political connections
- Small and medium enterprises
ASJC Scopus subject areas
- Finance
- Economics and Econometrics
Cite this
Can firms with political connections borrow more than those without? Evidence from firm-level data for Indonesia. / Fu, Jiangtao; Shimamoto, Daichi; Todo, Yasuyuki.
In: Journal of Asian Economics, Vol. 52, 01.10.2017, p. 45-55.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Can firms with political connections borrow more than those without? Evidence from firm-level data for Indonesia
AU - Fu, Jiangtao
AU - Shimamoto, Daichi
AU - Todo, Yasuyuki
PY - 2017/10/1
Y1 - 2017/10/1
N2 - Using a unique firm-level dataset for the manufacturing sector in Indonesia, we examine how firms’ political connections affect their access to finance and performance. We determine individual firm's political connections by identifying whether the government owns shares in the firm, whether politicians are on its board of directors, and whether highly-ranked managers personally know any politician. Although several studies have examined effects of political connections on firms financing and performance, we contribute to the literature by distinguishing between large firms and small and medium enterprises (SMEs), between the loan approval and amount setting processes, and between formal and informal political connections. We find that politically connected firms are more likely to be able to borrow from state-owned banks. Moreover, being connected to the government raises the probability that a firm can receive the full loan amount it applied for. The improvement in access to finance from political connections is more prominent for SMEs than for large firms. Furthermore, such improvement mostly comes from personal connections with politicians rather than more formal connections measured by the government ownership or politicians on the board of directors. Finally, we examine the effect of political connected lending on allocative efficiency of capital and find weak evidence that scarce financial resources are likely channeled by state-owned banks to politically connected but less productive firms.
AB - Using a unique firm-level dataset for the manufacturing sector in Indonesia, we examine how firms’ political connections affect their access to finance and performance. We determine individual firm's political connections by identifying whether the government owns shares in the firm, whether politicians are on its board of directors, and whether highly-ranked managers personally know any politician. Although several studies have examined effects of political connections on firms financing and performance, we contribute to the literature by distinguishing between large firms and small and medium enterprises (SMEs), between the loan approval and amount setting processes, and between formal and informal political connections. We find that politically connected firms are more likely to be able to borrow from state-owned banks. Moreover, being connected to the government raises the probability that a firm can receive the full loan amount it applied for. The improvement in access to finance from political connections is more prominent for SMEs than for large firms. Furthermore, such improvement mostly comes from personal connections with politicians rather than more formal connections measured by the government ownership or politicians on the board of directors. Finally, we examine the effect of political connected lending on allocative efficiency of capital and find weak evidence that scarce financial resources are likely channeled by state-owned banks to politically connected but less productive firms.
KW - Credit constraints
KW - Indonesia
KW - Political connections
KW - Small and medium enterprises
UR - http://www.scopus.com/inward/record.url?scp=85033213556&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85033213556&partnerID=8YFLogxK
U2 - 10.1016/j.asieco.2017.08.003
DO - 10.1016/j.asieco.2017.08.003
M3 - Article
AN - SCOPUS:85033213556
VL - 52
SP - 45
EP - 55
JO - Journal of Asian Economics
JF - Journal of Asian Economics
SN - 1049-0078
ER -