Impact of Corporate Political Connections on Cost of Equity: A Dynamic Panel Approach

Abstract

We analyze the impact of corporate political connections on the cost of equity of non-financial firms listed at the Pakistan Stock Exchange. We extract data from the DataStream and Election Commission of Pakistan for the years 2001 to 2018. The Generalized Method of Moments is used for data analysis. This research finds that firms use political connections to enjoy a lower cost of equity capital. Further, firms with strong ties to political power obtain more benefits on financing cost as compared to non-connected firms. Besides, we also find that firms affiliated with a large business group enjoy a lower cost of equity than non-affiliated connected firms. The findings may be helpful for regulators to formulate suitable policies concerning the use of corporate political strategies and to assist unconnected and non-affiliated firms to access finance easily.