Political connections and corporate activities : seasoned equity offerings, share repurchases, and M&A

Nnadi, MI

Abstract

This thesis studies the impact of political connections on firm activity. Given the literature gaps, the three corporate activities selected to be examined are i) seasoned equity offerings, ii) share repurchases, and iii) mergers and acquisitions.
First, the results of the study show the impact of political connection on seasoned equity offerings. Using seasoned equity offerings (SEOs) from 2005 to 2017 in the USA, the study shows that political connection is associated with lower SEO flotation costs, in terms of lower gross spreads and less adverse market reactions to SEO announcements. The empirical evidence is robust regarding controls for firm characteristics, corporate governance features, the removal of outliers, and an instrumental variable approach. The subsample analysis suggests that the effect is higher in primary issues. Additional analysis shows that political connection is negatively associated with SEO proceeds. Overall, the evidence is consistent with the argument that political connection reduces the cost of raising external capital.
Secondly, this study examines how political connections affect post-buyback performance. Politically connected firms generated higher post-buyback abnormal return and operating performance than unconnected firms. These differences persist after controlling firm characteristics, firm fixed effects, using a two-stage regression, and matching estimation. The probability of a company repurchasing shares and the amount of shares repurchased increases with political connectedness. Taken together, our study provides strong evidence that political connections have a significant effect on share repurchase activities.
Finally, this paper examines the effect of political connections on corporate risk-taking in mergers and acquisitions and associated implications on shareholder value. The results suggest that corporate political connections are positively associated with bidder post-acquisition financial leverage and equity return volatility around the M&A announcement period. Politically connected acquirers generated higher returns than non-connected bidders in risk-increasing deals, suggesting that investors perceive political connections as a means to hedge uncertainty from high risk deals. Further analysis suggests that politically connected bidders acquired more firms and are less likely to diversify and purchase more firms from the heavily regulated industries than non-connected acquirers.
Overall, the results of the three studies show new channels through which political connections affect corporate activities.

Citation

Nnadi, M. Political connections and corporate activities : seasoned equity offerings, share repurchases, and M&A. (Thesis). University of Salford

• Thesis Type: Thesis
• Deposit Date: Jun 9, 2021
• Publicly Available Date: Jun 9, 2021
• Award Date: Dec 4, 2020