Political connections, financing decisions and cash holdings: empirical evidence from Gulf Cooperation Council

Abstract

Purpose This study aims to investigate the relationship between political connections, financing decisions and cash holding. Design/methodology/approach Based on historical data from 181 active non-financial firms listed on Gulf Cooperation Council (GCC) Stock Exchange Markets during the period of 2009–2016, this study uses ordinary least squares and dynamic system-generalized method of moments to test the research hypotheses. The final data set comprises a total of 1,448 firm-year observations from ten major non-financial industry classifications. Findings This study finds a positive relationship between political connections and each of internal financing proxied by retained earnings ratio and external financing proxied by short- and long-term debt to total asset. The findings also show a positive relationship between political connections and cash holding. Practical implications The findings of the study provide a better understanding of the role of politically connected directors in financing decisions and cash holding in the GCC. Investors can consider the presence of royal family members in the board of directors when making investment decision. Policymakers are encouraged to develop more effective policies that encourage listed firms to provide information on the political positions of the board of directors, managers and major shareholders/owners of companies. Originality/value This study contributes to the literature by providing empirical evidence on the relationship between political connections and financing decisions by focusing on the GCC region. This study also highlights that boards in connected firms in the GCC have lower monitoring role owing to political interventions, and that connected firms face higher agency problems as they have weak governance and boards compared with non-connected firms.

Effects of chairman ownership on financing decisions: empirical evidence from GCC

“…(2020), who revealed that government ownership has a negative relationship with the total debt ratio. Tawfik et al . (2022) found negative impacts of the presence of royal family members in BDs and debt financing.…”

“…Company ownership in GCC countries has historically been concentrated in the hands of royal families and governments; thus, royal family members are on BDs or in high management positions (Al-Razeen and Karbhari, 2004; Sidani and Al Ariss, 2014; Alzahrani and Che-Ahmad, 2015). Tawfik et al . (2022) and Ding et al .…”

Does investment committee mitigate the risk of financial distress in GCC? The role of investment inefficiency

“…The controls include firm size (SIZE), leverage (LEV), research and development expenditures (R&D), cash holding (CASH), liquidity (QUICK), firm loss (LOSS) and profitability (ROA). We also follow Tawfik et al (2022) and include the gross domestic product (GDP) and inflation rate (INF) as country-level control variables. Appendix A provides detailed definitions and sources of information for all variables.…”

“…Financial distress refers to a situation whereby a company cannot generate sufficient cash to meet or pay its financial obligations which, if not well controlled, may lead to bankruptcy. As such, the presence of a high level of cash within a firm enables the company to avoid liquidity problems, meet its investment opportunities and minimise the costs associated with external financing by increasing the flexibility of internal financing (Al-Dhamari and Ismail, 2015; Eulaiwi et al , 2018; Tawfik et al , 2022). A review of the literature indicates that an effectively performing IC can assist the firm to hoard an optimal level of cash (Al-Hadi et al , 2020; Eulaiwi et al , 2018) to improve its investment efficiency (Eulaiwi et al , 2020), thereby improving the firm’s value (Al-Matari, 2019).…”

“…We focus our research on the six capital markets of the GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates), which were established as a regional body in 1981 to sustain economic cooperation and development in the Arabian Peninsula (Al-Shammari et al , 2008) and share considerable commonalities concerning their ethnicity, religion, cultural, legal and political system (Alazzani et al , 2021; Benboziane and Benmar, 2010). The GCC countries are characterised by generally weak investor protection (Al-Yahyaee et al , 2011; Tawfik et al , 2022), poorer regulatory quality, a low level of transparency (Al‐Hadi et al , 2016; Aldoseri et al , 2021) and a weaker enforcement regime (Al‐Hadi et al , 2017; Habbash and Alghamdi, 2017). These factors would affect the role of ICs in improving investment efficiency and, consequently, mitigating the corporate risk of default.…”