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This study aims to contribute to an understanding of politically connected audit committees on audit fees and the audit process in an emerging market, using the case of Malaysia. Malaysia offers an interesting and important setting as Malaysian companies are highly concentrated and politically sensitive. In particular, the study seeks to: (i) examine the level of political connections represented in the audit committees associated with the level of audit fees incurred by Malaysian public listed companies; and (ii) examine whether politically connected audit committees have an impact on the audit process. Currently, there is scant evidence on the influence of politically connected audit committees on audit fees and the audit process. The study draws upon agency and resource dependence theories, which suggest that politically connected audit committees serve two important functions: monitoring on behalf of the shareholders, and providing resources to the companies. For the purpose of this study, a mixed method approach (archival data analysis and interviews) has been adopted. Four hypotheses are tested: (1) There is a positive relationship between the proportion of audit committee members who are senior government officers (SGO) and audit fees; (2) There is a positive relationship between the proportions of audit committee members who are politicians and audit fees; (3) There is a positive relationship between the percentage of government shares and audit fees; and (4) There is a positive relationship between audit committee characteristics (independence, size, meeting and financial expertise) and audit fees. In addition, the knowledge obtained from the interviews with Big 4 auditors and members of audit committees from the selected companies provide further insights on the influence of political connections on the audit process. The results of the study indicate that politically connected audit committees (identified by members who are either senior government officers or politicians) have a significant association with the incidence of higher audit fees. This suggests that politically connected audit committees are able to capitalise on their connections to influence companies and create direct demand for the auditors to increase their audit effort, as measured by audit fees. Contrary to expectations, this study did not find a significant relationship between government shares and audit fees. This result may be explained by the fact that government shares are managed by a variety of institutions on behalf of the government, and differences in the objectives and characteristics of the institutions that administer the shares can weaken the demand for higher efforts from auditors. An in-depth analysis of the interviews further reveals that political connections do affect the audit process. It appears that the existence of political connections leads to an increase in audit work such in a variety of ways, such as auditor-client negotiations, private meetings with audit committees and re-engineering the scope and planning of the actual audit work. One of the issues that emerges from these findings is that companies highly value political connections to obtain external resources given the uncertainties in the business environment. Also, the findings highlight the need for stronger corporate governance to mitigate the higher inherent audit risks in politically connected companies.

This thesis is divided into two parts. The first part analyses recently published data from the Central Grant Registry (CEDR) on state grant distribution in Czechia between 1999 and the present year. In the second part, I link this data to information on political connections established through donations to parties and examine whether politically connected firms are more successful in competing for state grants. I match the donating firms to non-donating but otherwise similar firms using propensity scores based on a number of observable characteristics. The results indicate that donating companies have a 40% higher success rate in receiving state grants compared to non-donating firms. I find that the effect is higher for grants from the state budget than for grants from EU funds, which is consistent with EU-funded grants being subject to stricter regulations. JEL Classification D72, D73, H2, H71, H81 Keywords grants, subsidies, donations, political connections Author's e-mail martin.kopecek@smallhill.cz Supervisor's e-mail miroslav.palansky@gmail.com

This study investigates the relationships among corporate governance mechanism, firm performance, and executive compensation within Chinese publicly listed firms. The corporate governance structure in China is a unique combination of the Anglo-American model and the German system by including a board of director and a supervisory board simultaneously, and has two monitoring organs, independent directors and supervisory board, co-existing. One of the special features of the Chinese publicly listed firms is their close relationship with the government because most of them were converted from state-owned enterprises at the beginning of the market-oriented economic reform in China. Therefore, we attempt to explore the effects of political connections of their ultimate controllers on corporate governance mechanism, on firm performance, and on executive compensation in China. Our findings indicate a dysfunctional corporate governance system in China, which cannot bring improved firm performance but grant executives high compensations. While we take into consideration the political connections, our results show that they deteriorate corporate governance mechanism, but do not result in inferior firm performance. Robustness tests demonstrate a non-linear effect of corporate governance on executive compensation, jointly depending on the status of a firms political connection and its ownership structure.

Aquesta tesi esta composada per tres assaigs. Cadascún dels assaigs presenta investigació empírica original i independent analitzant els impactes de les connexions politiques sobre l’economia. Els articles fan una contribució significativa a aquesta literatura empírica, al mateix temps que subratllen les limitacions i desafiaments amb els que actualment s’enfronten els investigadors d’aquest camp. La recerca que aquí es presenta aplica desenvolupaments als metodes de recerca empirica que milloren la fiabilitat dels resultats. En el segon capitol s’estima l’impacte d’un aconteixement sorpresa a nivell polític sobre els retorns financers del mercat espanyol. Això inclou els impactes específics en determinats sectors i empreses que estan connectades políticament. En els últims dies de la campanya electoral per les eleccions generals espanyoles de l’any 2004, atacs terroristes van causar la mort de 191 persones que viatjaven en tren a la capital del país, Madrid. Quatre dies mes tard, el partit a l’oposició va guanyar les eleccions generals, en contra de totes les prediccions i enquestes que s’havien fet anteriorment a l’acció terrorista. Aquest canvi d’expectatives presenta una oportunitat única per aplicar tècniques d’event study per contrastar hipòtesis de política econòmica. L’anàlisi mostra que les hipòtesis de captura de polítics per empreses, junt amb problemes d’agència en empreses privatitzades i amb dispersió accionarial, no són rebutjades per les dades. En el tercer capítol, intento superar algunes de les limitacions de la recerca empírica en aquest camp, i exploro l’impacte de les connexions polítiques a les empreses en el rendiment empresarial. Ho faig fent servint les dos principals tècniques empíriques que es fan servir més comunment a la literatura economica: anàlisi centrat en establir les reaccions dels mercats financers a esdeveniments d’índole política; i anàlisi economètric de l’impacte de les connexions polítiques en el rendiment contable de les empreses. Els resultats de l’anàlisi indiquen que en els primers anys dels segle XXI, les connexions polítiques podrien haver tingut un impact negatiu sobre el rendiment de les empreses espanyoles. Tot i que els resultats basats en les reaccions dels mercats financers no són concloents, l’anàlisi economètric sobre mesures contables mostra una relació negativa i estadísticament significativa entre connexions polítiques i beneficis empresarials. Els resultats son consistents quan s’utilitzen diferents variables per mesurar el nivell de connexions polítiques, i també sota diverses especificacions economètriques que incloen regressions amb mètodes de variables instrumentals. Finalment, el capítol 4 considera l’influencia del sector privat en les decisions preses des de l’administració pública. Això contrasta amb l’anàlisi presentat en els dos capítols anteriors i a la majoria de recerca empírica en aquest camp, on el que es considera es generalment l’impacte de les connexions polítiques sobre els resultats econòmics empresarials. L’anàlisi està basat en dades del Regne Unit sobre la concessió de subsidis a empreses per dur a terme recerca i desenvolupament. L’agència responsable de la concessió de subsidis al Regne Unit, la Technology Strategy Board, s’encarrega en primer lloc d’identificar àrees de prioritat tecnològica. Un cop aquestes arees són aprovades i dotades de recursos pel Govern, l’agència s’encarrega de convocar concursos i seleccionar les propostes guanyadores. Els resultats de l’anàlisi suggereixen que el programa de subsidis, tot i ser efectiu en corretgir alguns errors de mercat, està esbiaixat en la distribució dels subsidis cap a aquelles empreses que estan directament connectades amb l’agència. / This thesis is composed by three essays, each presenting independent and original empirical research on the impacts of political connections on the economy. This research makes a significant contribution to such empirical literature. It also highlights the limitations and challenges that are currently faced by researchers in this field and applies developments to the empirical methods which improve the reliability of results. In Chapter 2 I estimate the impact of a surprise political event on the financial returns of the Spanish markets, including the specific impacts on selected sectors and politically connected companies. In the last days of the electoral campaign for the 2004 general election in Spain, on Thursday March 11th 2004, a series of simultaneous terror attacks caused the death of 191 persons in commuting trains in the capital Madrid. Four days later, the opposition party won the election, against all predictions that were made prior to the terror attacks. This change in expectations presents us with a unique opportunity to take advantage of event study techniques to test some politico-economic hypotheses. The analysis shows that such hypothesis of capture of politicians by firms, in itself and combined with agency problems in privatized firms with dispersed shareholdings, is not rejected by the data. In Chapter 3, I undertake to overcome some of the constraints in the empirical literature by exploring the impact of political connections on firm performance by employing the two main empirical approaches that have been applied to ascertain the impact of connections on the performance of firms: analysis of financial markets reactions to political events; and econometric analysis of the impact of political connections on accounting-type measures of firm performance. The results of the analysis indicate that in Spain, in the first years of the 21st century, political connections may have had a negative impact on firms’ profits. Even though results from the financial markets-based analysis are inconclusive, the econometric analysis of accounting-based measures of performance shows a negative and highly statistically significant negative impact of political connections on firm’s performance. The results hold regardless of the particular variable or measure that is used to proxy for political connectedness, and under different considerations of the degree of connections that is considered. The results also hold when controlling for the potential endogeneity that may exist - whereas connections to politicians might result in better (worse) business performance, also changes in business performance might lead to higher (lower) connections. Finally, Chapter 4 considers the influence of the private sector on decisions taken by the public sector. This is in contrast with chapters 2 and 3, and most of the empirical literature on political connections, which consider the impacts of politicians on the economic outcomes of the private sector. The analysis is based on UK data where as in most countries R&D grants are conceded in a beauty contest process. The Technology Strategy Board (TSB), the UK agency responsible for offering such grants, jointly with its funding Government Department, identifies technology and research priority areas, after which specific competitions are run and winning projects selected. The results suggest that whilst the R&D cooperative programme is to an extent effective in targeting the market failures it aims to address, its allocation of grants across the private sector is biased towards connected businesses, after controlling for company and sector specific factors.

This study investigates the relationships among corporate governance mechanism, firm performance, and executive compensation within Chinese publicly listed firms. The corporate governance structure in China is a unique combination of the Anglo-American model and the German system by including a board of director and a supervisory board simultaneously, and has two monitoring organs, independent directors and supervisory board, co-existing. One of the special features of the Chinese publicly listed firms is their close relationship with the government because most of them were converted from state-owned enterprises at the beginning of the market-oriented economic reform in China. Therefore, we attempt to explore the effects of political connections of their ultimate controllers on corporate governance mechanism, on firm performance, and on executive compensation in China. Our findings indicate a dysfunctional corporate governance system in China, which cannot bring improved firm performance but grant executives high compensations. While we take into consideration the political connections, our results show that they deteriorate corporate governance mechanism, but do not result in inferior firm performance. Robustness tests demonstrate a non-linear effect of corporate governance on executive compensation, jointly depending on the status of a firms political connection and its ownership structure.

abstract: In this study, I test whether firms reduce the information asymmetry stemming from the political process by investing in political connections. I expect that connected firms enjoy differential access to relevant political information, and use this information to mitigate the negative consequences of political uncertainty. I investigate this construct in the context of firm-specific investment, where prior literature has documented a negative relation between investment and uncertainty. Specifically, I regress firm investment levels on the interaction of time-varying political uncertainty and the degree of a firm's political connectedness, controlling for determinants of investment, political participation, general macroeconomic conditions, and firm and time-period fixed effects. Consistent with prior work, I first document that firm-specific investment levels are significantly lower during periods of increased uncertainty, defined as the year leading up to a national election. I then assess the extent that political connections offset the negative effect of political uncertainty. Consistent with my hypothesis, I document the mitigating effect of political connections on the negative relation between investment levels and political uncertainty. These findings are robust to controls for alternative explanations related to the pre-electoral manipulation hypothesis and industry-level political participation. These findings are also robust to alternative specifications designed to address the possibility that time-invariant firm characteristics are driving the observed results. I also examine whether investors consider time-varying political uncertainty and the mitigating effect of political connections when capitalizing current earnings news. I find support that the earnings-response coefficient is lower during periods of increased uncertainty. However, I do not find evidence that investors incorporate the value relevant information in political connections as a mitigating factor. / Dissertation/Thesis / Doctoral Dissertation Accountancy 2014

We introduce the topic of this Special Issue on the "Role of Financial and Legal Institutions in International Governance", with a particular emphasis on a notion of "international mobility of corporate governance". Our discussion places the Special Issue at the intersection of law, finance, and international business, with a focus on the contexts of foreign investors and directors. Country-level legal and regulatory institutions facilitate foreign ownership, foreign directors, raising external financial capital, and international M&A activity. The interplay between the impact of foreign ownership and foreign directors on firm governance and performance depends on international differences in formal/regulatory institutions. In addition to legal conditions, informal institutions such as political connections also shape the economic value of foreign ownership and foreign directors. We highlight key papers in the literature, provide an overview of the new papers in this Special Issue, and offer suggestions for future research.

This thesis is about how elected politicians stay in power and about some of its economic and social consequences, fundamental political economy questions. It takes advantage of the decentralized political structure in the Philippines to test models of voter and politician behavior. In doing so, it contributes to the literature on clientelism and retrospective voting. In Chapter One, I assess the impacts of targeted government transfers on a local incumbent's electoral performance. I use the randomized roll-out of a CCT program in the Philippines where a number of municipalities are tightly controlled by political dynasties. In a competitive political environment, incumbent vote share is 26 percentage-points higher in municipalities where the program was implemented in all villages than in municipalities where the program was implemented in half of them. The program had no impact in municipalities with low levels of political competition. In Chapter Two, I test for the presence of political business cycles in Philippine municipalities over the period 2003-2009, a context where according to the literature such cycles are likely to be observed. I find robust evidence for the presence of political business. This effect is only present when I use quarterly data and vanishes when I aggregate the data at the yearly-level. The difference is not merely driven by a decline in statistical power due to aggregation: point estimates for the overall effects are 7 times larger when I use quarterly data than when I use yearly data. This discrepancy can be explained by a drop in employment post-election that dilutes the yearly effects. In Chapter Three, we estimate the impacts of being connected to local politicians, either currently in office or in opposition, on occupational choice. We use a large administrative dataset collected between 2008 and 2010 on all individuals in 700 Philippine municipalities along with information on all candidates in the 2007 and 2010 municipal elections. We rely on local naming conventions to assess blood and marriage links between households. Using individuals connected to successful candidates in the 2010 elections that did not run in 2007 as a control group, we find that connections to current office-holders increase the likelihood of being employed in better paying occupations. Individuals connected to candidates that were close to being elected in 2007 are less likely to be employed in better paying occupations.

Cette thèse se compose de trois chapitres distincts. Le premier chapitre examine le lien de causalité entre l’offre de prêts syndiqués par des banques et les contributions de campagnes électorales par des entreprises non-financières aux États-Unis au cours de la crise financière de 2007–2008. Les résultats indiquent qu’une diminution de 10% de l’offre de prêt à une entreprise donnée par ses prêteurs pré-crise pendant la première période de crise entraîne une augmentation de 9% des contributions de campagne par cette entreprise en 2008. De plus, le niveau de contributions de campagne par des entreprises dans le passé est positivement associé à des conditions de prêt favorables dans l’avenir. Les résultats appuient l’idée que les contributions de campagne sont un investissement dans le capital politique plutôt qu’une simple forme de bien de consommation. Le deuxième chapitre identifie l’effet d’exposition industrielle de banques avant leur entrée sur le marché sur la croissance de production des secteurs de fabrication. Les résultats indiquent que plus grande est la différence de spécialisation dans un secteur entre deux états, plus grand est l’impact d’intégration bancaire sur la croissance de ce secteur dans l’état qui est moins spécialisé. Le dernier chapitre examine si l’intégration bancaire dans plusieurs régions a un impact sur le marché de contrôle des entreprises entre elles. Les résultats indiquent qu’il y a plus de fusions, acquisitions et cessions dans les paires d’états dont les systèmes bancaires ont connu une plus grande intégration, par rapport à des paires d’états sans une telle intégration. Les résultats dans les deux derniers chapitres indiquent un canal bancaire qui façonne le paysage industriel d’états. / This dissertation is made of three distinct chapters. The first chapter examines the causal link between banks’ syndicated loan supply and non-financial firms’ campaign contributions for US elections during the 2007-2008 financial crisis. The results indicate that a 10% decrease in loan supply of a given firm by its pre-crisis relationship lenders during the early crisis period leads to a 9% increase in firm’s campaign contributions in 2008. Further, firms’ level of past campaign contributions is positively associated with favorable loan terms for the future. The findings lend support to the idea that campaign contributions are an investment in political capital rather than merely a form of consumption good. The second chapter identifies the effect of banks’ industry exposures prior to market-entry on the output growth of manufacturing sectors through US bank-entry deregulations. The findings indicate that the larger the discrepancy in specialization in an industry between a state-pair, the higher the impact of banking integration on the growth of that sector in the state that is less-specialized. The last chapter examines whether banking integration across regions has any impact on the market for corporate control between them. The results show that there are more M&As and divestitures across state-pairs whose banking systems have experienced a higher integration, compared to state-pairs with no such integration. The findings in the last two chapters indicate a banking channel that shapes the states’ industrial landscape.