Corrupt or just well-connected?

2010

At what point does being "well connected" start to means being corrupt? That's the subtext behind a new study published in the Autumn 2010 issue of the journal Financial Management which argues that not only does corruption exist in the corporate world, but that political connections are extremely important for corporate success.

Author Mara Faccio studied several thousand firms from forty-seven countries. She classifies a politically-connected firm as "A company where at least one of its large shareholders (anyone controlling at least ten percent of voting shares) or one of its top officers (CEO, president, vice-president, chairman, or secretary) is a member of parliament, a minister, or is closely related to a top politician or party."

According to Faccio, "Politically connected firms have higher leverage (in the form of preferential loans), pay lower taxes, have regulatory protection, are eligible for government aid, and have stronger market power.

"They differ more dramatically from their peers when their political links are stronger, and in more corrupt countries, although these characteristics can be observed worldwide."

The study also suggests that well-connected firms enjoy substantial favors from their governments, which further indicates that the distortions in the allocation of public resources are common in both emerging and developed countries.

"My study affects day-to-day corporate decisions. It is unfortunate that firms with no political ties appear to be at a disadvantage. Those in leadership at politically connected firms need to think about how their choices affect the long-term operations of their business, and the business and political world at large," she said.

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