POLITICAL CONNECTIONS AND THE VALUE OF CASH HOLDINGS
DR. YUANTO KUSNADI, Singapore Management University
Do investors value the cash holdings of politically connected firms? According to a recent Finance Research Letters article, the effect is influenced by the channel through which the connections are established as well as the strength of institutions governing the country that the firm is located in.
An international study by Prof. Yuanto Kusnadi covering more than 8,000 firms from 24 countries found that political connections are negatively associated with the valuation of cash holdings. This negative association is stronger for firms in emerging markets whose political connections are established through large shareholders. However, the presence of strong legal institutions helps to mitigate the adverse effects of political connections.
Implication for family enterprises:
The findings from this article informs the investment decisions of family offices and private investment managers. In particular, investors should perform thorough background checks on the potential political ties of large shareholders of the firms they are considering investments in; and examine how the cash holdings are being utilized.
Family offices and private investment managers should focus on value-increasing investments in firms that are located in developed markets (such as Singapore), which are more protected by the presence of strong legal environment. In this way, the negative effects of political connections and large cash holdings on the firm value may be minimized.
Source: Kusnadi, Y. Political connections and the value of cash holdings. Finance Research Letters