Enduring corporate political connections and loan contracting: evidence from the GCC countries

Purpose An important question is whether lenders perceive politically connected firms as having less or higher default risk, and thus provide them with more or less preferential loan terms compared with non-connected firms. This paper aims to examine the relationship between political connections of...

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Bibliographic Details
Published in:Journal of accounting & organizational change 2023-01, Vol.19 (1), p.89-114
Main Authors: Almarhabi, Hanan Hasan, Ahmed, Kamran, Mather, Paul
Format: Article
Language:English
Subjects:
Bond markets
Capital markets
Commercial banks
Cooperation
Corporate governance
Debt financing
Default
Loans
Politics
Regulatory reform
Stockholders
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Summary:Purpose An important question is whether lenders perceive politically connected firms as having less or higher default risk, and thus provide them with more or less preferential loan terms compared with non-connected firms. This paper aims to examine the relationship between political connections of corporate board members and cost of debt and loan contracting in the Gulf Cooperation Council (GCC) countries. Design/methodology/approach The initial sample comprises 288 GCC firm-year observations from 227 publicly listed firms in Oman, Qatar, Saudi Arabia and United Arab Emirates for the period from 2011 to 2015. It includes all the GCC publicly listed firms, excluding those in the financial, insurance and banking sectors because these entities are subject to different regulations. The ordinary least squares, logit regression and other sensitivity tests have been used to analyse the data and enhance reliability of the results. Findings This study finds that politically connected firms, particularly those connected through ruling royal family members, are associated with lower cost of debt, greater amounts of loans and longer-term government loans. Therefore, these findings support the prediction that political connections benefit GCC firms in the form of access to favourable terms from both government and commercial banks. Originality/value This study contributes to the extant literature by providing insightful analysis using unique political features of the GCC, integrated with agency and resource dependency theories. In particular, this study fills the gap in understanding the nature of loan contracting offered by government and commercial banks in the presence of politically connected boards within GCC setting.
ISSN:1832-5912
1839-5473
1832-5912
DOI:10.1108/JAOC-08-2021-0117