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Do different political connections affect firms' distress risk differently?

Thang Xuan Nguyen (National Economics University, Hanoi, Vietnam)
Khanh Hoang (National Economics University, Hanoi, Vietnam)
Cuong Cao Nguyen (Faculty of Agribusiness and Commerce, Lincoln University, Lincoln, New Zealand)
Thang Ngoc Bach (National Economics University, Hanoi, Vietnam)

International Journal of Emerging Markets

ISSN: 1746-8809

Article publication date: 30 April 2021

Issue publication date: 24 February 2023

628

Abstract

Purpose

This paper investigates how different types of corporate political connection, including government-linked investment (GLI), former officials as politically-connected directors (PCD), cronyism (CRO) and government leaders' family ties (FAM), influence financial distress risk in Malaysian firms.

Design/methodology/approach

We separate political connections into four distinct categories and investigate their relationship with firm distress risk and compare the results with the one-size-fits-all treatment which is popular in the literature. We apply a battery of sensitivity test to ensure that our inferences are robust to a wide range of test specifications, endogeneity concern and sample selection methods.

Findings

The empirical results show that the effect of political connections on distress risk is strongly heterogeneous. GLI and PCD firms tend to have higher distress risk via increased risk-taking behaviors because of the different incentives of the connections, while this nexus does not directly exhibit in CRO and FAM firms. Further analyses reveal that CRO and FAM firms are more likely to venture into risky international diversification, thus indirectly amplifying their distress risk.

Originality/value

Our findings are novel and provide practical implications for financial analysts, investors and portfolio managers operating in the capital markets.

Keywords

Acknowledgements

The authors are grateful to the editors, Ilan Alon, Duc Khuong Nguyen, three anonymous reviewers, Nick Nguyen (Auckland University of Technology, Auckland, New Zealand), their colleagues at Lincoln University (Lincoln, New Zealand) and National Economics University (Hanoi, Vietnam) for their constructive comments and suggestions to the manuscript. The authors also thank Wai-Yan Wong and Chee-Wooi Hooy for providing the list of Malaysian non-connected firms from their study.

Funding: This research is funded by the National Economics University, Hanoi, Vietnam.

Citation

Nguyen, T.X., Hoang, K., Nguyen, C.C. and Bach, T.N. (2023), "Do different political connections affect firms' distress risk differently?", International Journal of Emerging Markets, Vol. 18 No. 2, pp. 376-398. https://doi.org/10.1108/IJOEM-08-2020-0874

Publisher

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Emerald Publishing Limited

Copyright © 2021, Emerald Publishing Limited

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