Toronto, July 23 (IANS) Politically connected companies with excess cash holdings may be placing political interests before profitability, a study says.
The company may pay to invest, but it might be worth more to invest in firms with no such ties.
Sadok El Ghoul, associate professor at University of Alberta Saint-Jean, and fellow researchers from the American University of Sharjah and the Olayan School of Business explored the workings of politically connected firms.
In a review of firms from 31 countries, they contend that firms that have some level of political connection, direct or indirect, are more likely to have greater cash holdings than non-connected firms. This money, they suggest, is often used as a resource for the firms' political friends, the International Journal of Accounting reports.
El Ghoul and colleagues say that the motivations of managers in politically connected firms may be misplaced. Hoarding excess cash runs contrary to the notion of maximising profit and value for a company's shareholders, according to an Alberta statement.
Instead, he says, this money could be used by the politically connected friends of the firm to serve personal interests related to their political agenda. These corporations are viewed as cash cows for those in political power, he says.
"The companies might use that excess cash to finance political campaigns and to pay bribes. They might also hoard more cash to invest in unprofitable regions, in regions where votes matter but profitability is not there," said El Ghoul.
"These are uses that do not obey the objective of value maximisation, but rather obey the political objectives of the politician friends of those politically connected firms," he added.
The root of the problem, El Ghoul says, is poor corporate governance.
"In several countries, managers of politically connected firms operate with impunity, without being monitored by shareholders," he said. Minority shareholders are the real victims of these types of firms. He says they lose out on receiving fair recompense-dividends-for the stock.
They are also essentially powerless to change the regulation process, because change requires political will from the very politicians who benefit from the situation, making such a reform unlikely.
"The politicians with ties to the corporate sector have no incentive to change the regulations in favour of more transparent, well-functioning corporate governance systems," said El Ghoul. "The minority shareholders do not have a say in the corporate behaviour, on what the large shareholders are doing.
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