Elections, Political Connections and Cash Holdings: Evidence from Local Assemblies

Adeabah, David and Andoh, Charles and Asongu, Simplice and Akomea-Frimpong, Isaac (2021): Elections, Political Connections and Cash Holdings: Evidence from Local Assemblies.

Abstract

We examine the relationship between elections, political connections, and cash holdings in Ghanaian local assemblies. Using a panel dataset of 179local assemblies over a period 2012 to 2017, a panel regression and the generalized method of moments estimation techniques was employed for the analysis. We find that local assemblies hold less cash during election years, which suggests that election may be one of the potential factors to mitigate agency conflict in weak governance environment. Further, we demonstrate that local assemblies that have political connections hold less cash; however, political uncertainty makes these entities conducive to agency problems than their non-connected peers because they hold more cash. Additional analysis indicates that one year prior to elections, managerial conservatism kicks-in and leads managers to hold more cash in local assemblies that have political connections, which continues and becomes more pronounced in election years. Our results have implications for regulations on the cash management practices of local assemblies.

• Item Type: MPRA Paper
• Language: English
• Keywords: agency problem; cash holdings; generalized method of moments; panel regression; political connections
• Subjects: C - Mathematical and Quantitative Methods > C1 - Econometric and Statistical Methods and Methodology: General; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development

References

Adhikari, A., Derashid, C., & Zhang, H. (2006). Public policy, political connections, and effective tax rates: Longitudinal evidence from Malaysia. Journal of Accounting and Public Policy, 25(5), 574–595. https://doi.org/10.1016/j.jaccpubpol.2006.07.001

An, H., Chen, Y., Luo, D., & Zhang, T. (2016). Political uncertainty and corporate investment: Evidence from China. Journal of Corporate Finance, 36, 174–189. https://doi.org/10.1016/j.jcorpfin.2015.11.003

Arellano, M., & Bond, S. (1991). Some Tests of Specification for Panel Carlo Application to Data : Evidence and an Employment Equations. The Review of Economic Studies, 58(2), 277–297.

Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics, 68(1), 29–51. https://doi.org/10.1016/0304-4076(94)01642-D

Asongu, S. A., Le Roux, S., & Biekpe, N. (2017). Environmental degradation, ICT and inclusive development in Sub-Saharan Africa. Energy Policy, 111(July), 353–361. https://doi.org/10.1016/j.enpol.2017.09.049

Asongu, S. A., & Nwachukwu, J. C. (2018). Educational quality thresholds in the diffusion of knowledge with mobile phones for inclusive human development in sub-Saharan Africa. Technological Forecasting and Social Change, 129(July 2016), 164–172. https://doi.org/10.1016/j.techfore.2018.01.004

Aytaç, S. E. (2014). Distributive Politics in a Multiparty System: The Conditional Cash Transfer Program in Turkey. Comparative Political Studies, 47(9), 1211–1237. https://doi.org/10.1177/0010414013495357

Bao, X., Johan, S., & Kutsuna, K. (2016). Do political connections matter in accessing capital markets? Evidence from China. Emerging Markets Review, 29, 24–41. https://doi.org/10.1016/j.ememar.2016.08.009

Batta, G., Sucre Heredia, R., & Weidenmier, M. (2014). Political Connections and Accounting Quality under High Expropriation Risk. European Accounting Review, 23(4), 485–517. https://doi.org/10.1080/09638180.2014.906316

Bliss, M. A., & Gul, F. A. (2012). Political connection and cost of debt: Some Malaysian evidence. Journal of Banking and Finance, 36(5), 1520–1527. https://doi.org/10.1016/j.jbankfin.2011.12.011

Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1), 115–143. https://doi.org/10.1016/S0304-4076(98)00009-8

Boubakri, N., Cosset, J. C., & Saffar, W. (2012). The impact of political connections on firms’ operating performance and financing decisions. Journal of Financial Research, 35(3), 397–423. https://doi.org/10.1111/j.1475-6803.2012.01322.x

Boubakri, N., Ghoul, S. El, & Saffar, W. (2013). Cash holdings of politically connected firms. Journal of Multinational Financial Management, 23(4), 338–355. https://doi.org/10.1016/j.mulfin.2013.06.002

Calabrese, T. D., & Gupta, A. (2019). A Replication of “Agency Problems of Excess Endowment Holdings in Not-for-profit Firms” (Journal of Accounting and Economics, 2006). Public Finance Review, 47(4), 747–774. https://doi.org/10.1177/1091142118765788

Chaney, P. K., Faccio, M., & Parsley, D. (2011). The quality of accounting information in politically connected firms. Journal of Accounting and Economics, 51(1–2), 58–76. https://doi.org/10.1016/j.jacceco.2010.07.003

Chen, R. R., El Ghoul, S., Guedhami, O., & Nash, R. (2018). State Ownership and Corporate Cash Holdings. Journal of Financial and Quantitative Analysis. https://doi.org/10.1017/S0022109018000236

Chen, Y., Chen, D., Wang, W., & Zheng, D. (2018). Journal of Accounting and Public Policy Political uncertainty and fi rms ’ information environment : Evidence. Journal of Accounting and Public Policy, 37(1), 39–64. Retrieved from https://doi.org/10.1016/j.jaccpubpol.2018.01.005

Chen, Y. S., Shen, C. H., & Lin, C. Y. (2014). The Benefits of Political Connection: Evidence from Individual Bank-Loan Contracts. Journal of Financial Services Research, 45(3), 287–305. https://doi.org/10.1007/s10693-013-0167-1

Chkir, I., Gallali, M. I., & Toukabri, M. (2020). Political connections and corporate debt: Evidence from two U.S. election campaigns. Quarterly Review of Economics and Finance, 75, 229–239. https://doi.org/10.1016/j.qref.2019.05.003

Claessens, S., Feijen, E., & Laeven, L. (2008). Political connections and preferential access to finance: The role of campaign contributions. Journal of Financial Economics, 88(3), 554–580. https://doi.org/10.1016/j.jfineco.2006.11.003

Core, J. E., Guay, W. R., & Verdi, R. S. (2006). Agency problems of excess endowment holdings in not-for-profit firms. Journal of Accounting and Economics, 41(3), 307–333. https://doi.org/10.1016/j.jacceco.2006.02.001

Corrêa, D. S. (2015). Conditional cash transfer programs, the economy, and presidential elections in latin America. Latin American Research Review, 50(2), 63–85. https://doi.org/10.1353/lar.2015.0020

Dittmar, A., Mahrt-smith, J., & Servaes, H. (2003). International Governance Corporate Cash Holdings Corporate. The Journal of Financial and Quantitative Analysis, 38(1), 111–133.

Faccio, M. (2006). Politically connected firms. American Economic Review, 96(1), 369–386. https://doi.org/10.1257/000282806776157704

Feng, H., & Rao, R. P. (2018). Cash holdings and CEO risk incentive compensation: Effect of CEO risk aversion. International Review of Financial Analysis, 60, 162–176. https://doi.org/10.1016/j.irfa.2018.09.009

Fisman, R., & Hubbard, R. G. (2005). Precautionary savings and the governance of nonprofit organizations. Journal of Public Economics, 89(11–12), 2231–2243. https://doi.org/10.1016/j.jpubeco.2004.10.005

Gore, A. K. (2009). Why do cities hoard cash? determinants and implications of municipal cash holdings. Accounting Review, 84(1), 183–207. https://doi.org/10.2308/accr.2009.84.1.183

Guo, C. (2007). When government becomes the principal philanthropist: The effects of public funding on patterns of nonprofit governance. Public Administration Review, 67(3), 458–473. https://doi.org/10.1111/j.1540-6210.2007.00729.x

Harford, J., Mansi, S. A., & Maxwell, W. F. (2008). Corporate governance and firm cash holdings in the US. Journal of Financial Economics, 87(3), 535–555. https://doi.org/10.1016/j.jfineco.2007.04.002

Hill, M. D., Fuller, K. P., Kelly, G. W., & Washam, J. O. (2014). Corporate cash holdings and political connections. Review of Quantitative Finance and Accounting, 42(1), 123–142. https://doi.org/10.1007/s11156-012-0336-6

Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance, and takeovers. The American Economic Review, 76(2), 323–329. https://doi.org/10.1017/cbo9780511609435.005

Julio, B., & Yook, Y. (2012). Political uncertainty and corporate investment cycles. Journal of Finance, 67(1), 45–83. https://doi.org/10.1111/j.1540-6261.2011.01707.x

Kalcheva, I., & Lins, K. V. (2007). International evidence on cash holdings and expected managerial agency problems. Review of Financial Studies, 20(4), 1087–1112. https://doi.org/10.1093/rfs/hhm023

Kim, C., Mauer, D. C., & Sherman, A. E. (1998). The Determinants of Corporate Liquidity : Theory and Evidence. The Journal of Financial and Quantitative Analysis, 33(3), 335–359.

Kusnadi, Y. (2019). Political connections and the value of cash holdings. Finance Research Letters, 30(March), 96–102. https://doi.org/10.1016/j.frl.2019.03.035

Lecy, J. D., & Searing, E. A. M. (2015). Anatomy of the Nonprofit Starvation Cycle: An Analysis of Falling Overhead Ratios in the Nonprofit Sector. Nonprofit and Voluntary Sector Quarterly, 44(3), 539–563. https://doi.org/10.1177/0899764014527175

Lee, S., & Woronkowicz, J. (2019). Nonprofit cash holdings and spending: The missing role of government funding. Nonprofit Management and Leadership, 29(3), 321–340. https://doi.org/10.1002/nml.21342

Li, X., Luo, J., & Chan, K. C. (2018). Political uncertainty and the cost of equity capital. Finance Research Letters, 26, 215–222. https://doi.org/10.1016/j.frl.2018.01.009

Lin, T. J., Chang, H. Y., Yu, H. F., & Kao, C. P. (2019). The impact of political connections and business groups on cash holdings: Evidence from Chinese listed firms. Global Finance Journal, 40, 65–73. https://doi.org/10.1016/j.gfj.2018.10.001

Lux, S., Crook, T. R., & Woehr, D. J. (2011). Mixing Business With Politics: A Meta-Analysis of the Antecedents and Outcomes of Corporate Political Activity. Journal of Management, 37(1), 223–247. https://doi.org/10.1177/0149206310392233

Opler, T., Pinkowitz, L., Stulz, R., & Williamson, R. (1999). The determinants and implications of corporate cash holdings. Journal of Financial Economics, 52(1), 3–46. https://doi.org/10.1016/s0304-405x(99)00003-3

Panousi, V., & Papanikolaou, D. (2012). Investment, Idiosyncratic Risk, and Ownership. The Journal of Finance, LXVII(3), 1113–1148.

Phan, H. V., Nguyen, N. H., Nguyen, H. T., & Hegde, S. (2019). Policy uncertainty and firm cash holdings. Journal of Business Research, 95(October 2018), 71–82. https://doi.org/10.1016/j.jbusres.2018.10.001

Pinkowitz, L., Stulz, R., & Williamson, R. (2006). Does the contribution of corporate cash holdings and dividends to firm value depend on governance? A cross-country analysis. Journal of Finance, 61(6), 2725–2751. https://doi.org/10.1111/j.1540-6261.2006.01003.x

Pinkowitz, L., & Williamson, R. (2001). Bank power and cash holdings: Evidence from Japan. Review of Financial Studies, 14(4), 1059–1082. https://doi.org/10.1093/rfs/14.4.1059

Ramirez, A. (2011). Nonprofit cash holdings: Determinants and implications. Public Finance Review, 39(5), 653–681. https://doi.org/10.1177/1091142110381638

Saeed, A., Belghitar, Y., & Clark, E. (2014). Theoretical motives of corporate cash holdings and political connections: firms level evidence from a developing economy. International Review of Applied Economics, 28(6), 813–831. https://doi.org/10.1080/02692171.2014.923387

Stulz, R. M. (1990). Managerial discretion and optimal financing policies. Journal of Financial Economics, 26(1), 3–27. https://doi.org/10.1016/0304-405X(90)90011-N

Su, Z. qin, Fung, H. G., Huang, D. shi, & Shen, C. H. (2014). Cash dividends, expropriation, and political connections: Evidence from China. International Review of Economics and Finance, 29, 260–272. https://doi.org/10.1016/j.iref.2013.05.017

Waisman, M., Ye, P., & Zhu, Y. (2015). The effect of political uncertainty on the cost of corporate debt. Journal of Financial Stability, 16, 106–117. https://doi.org/10.1016/j.jfs.2015.01.002

Xu, N., Chen, Q., Xu, Y., & Chan, K. C. (2016). Political uncertainty and cash holdings: Evidence from China. Journal of Corporate Finance, 40, 276–295. https://doi.org/10.1016/j.jcorpfin.2016.08.007