Publication Details

Cao, J., Huang, S., Liu, Q. & Tian, G. G. (2012). The stock market implication of political connections: evidence from firms' dividend policy. FMA Asian Meeting (pp. 1-35). Phuket, Thailand: Financial Management Association International.


Political connections are valuable for shareholders of privately-run firms especially in countries with weak legal institutions. We study the effect of a firm's political connections in the public equity market by focusing on its impact on the firms' dividend policy. Prior studies suggest that dividends signal the commitment for proper treatment of minority shareholders and thus high growth firms pay dividends to establish such a reputation for better access to equity market in the future. Using a sample of privately-owned Chinese firms, we find that politically connected firms are less likely to pay dividends and pay less if they pay. Investors value firms' political connections more than dividends, and they are more likely to endorse managerial decisions in politically connected firms. Specifically, investors of these firms have a significantly lower valuation of dividend payouts than otherwise similar firms but without connections. They prefer firm investments to cash payouts by connected firms with high growth opportunities, and tend to value these firms' investment decisions significantly higher. Finally, connected firms are also more able to tap public equity market for funds. Our study sheds light on the effect of political connections on firm policies.

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