Wharton-SMU Research Center Corporate Transparency and Political Connections

In this paper, we study the corporate transparency choices of firms operating in a weak institutional environment. We argue that in relationship-based systems, high levels of corporate transparency and strong political connections are alternative means to create firm value. Firms can try to commit to more transparency by issuing securities abroad. However, the expanded disclosures and additional scrutiny that come with having foreign securities are often at odds with close political ties at home because these ties can best be exploited when little is disclosed about the firm. Using data from Indonesia, we provide strong support for the hypothesis that corporate transparency and political connections are substitutes: Firms with close political ties to former President Suharto are significantly less likely than non-connected firms to issue foreign securities. To study the performance effects of firms’ transparency choices, we examine how returns during the Asian financial crisis differ between transparent and non-transparent firms. Consistent with prior work, we find that transparent firms exhibit higher returns during the crisis. However, our data indicate that politically well-connected firms also received considerable support during this period. As a result, previous estimates of the value of corporate transparency appear to be considerably biased. JEL classification: P16, G32, G38, K22, K42, M41, G18