Влияние политических связей на стоимость российских компаний тема диссертации и автореферата по ВАК РФ 08.00.05, кандидат наук Трифонов Дмитрий Александрович

• Трифонов Дмитрий Александрович
• кандидат наук
• 2022

Оглавление диссертации кандидат наук Трифонов Дмитрий Александрович

TABLE OF CONTENTS

INTRODUCTION

1 POLITICAL CONNECTIONS: THEORETICAL FOUNDATIONS AND EMPIRICAL

OUTLET

1.1 Outline of the research history

1.2 The theoretical foundations of empirical studies in political connections

1.3 Economic rent as a result of political connections

1.4 The state of the art in empirical studies on political connections

1.5 Political connections in Russia: institutional settings and previous literature

1.6 How Russian corporations are governed

1.7 Summary of Chapter

2 DEFINING, IDENTIFYING, AND QUANTIFYING POLITICAL CONNECTIONS

2.1 Definition of political connections

2.1.1 How political connections are defined in international studies

2.1.2 What does this research mean by political connections

2.1.3 Political connections and state ownership

2.2 Identification of political connections

2.2.1 General principles

2.2.2 Mapping to the list of the top government officials of Russia

2.2.3 Lexical analysis

2.2.3.1 The logic of lexical analysis

2.2.3.2 The mechanism of the lexical analysis

2.2.3.3 The tokens

2.2.4 Manual control

2.3 Quantification of political connections

2.4 Sample

2.5 Summary of Chapter

3 THE DISTRIBUTION OF CORPORATE POLITICAL CONNECTIONS IN RUSSIA

3.1 The scales of political connections

3.2 The dynamics of political connectedness

3.3 The role of state ownership in political connections

3.4 The role of directors in political connections

3.5 The role of industry affiliation in political connections

3.6 The role of firm age in political connections

3.7 The role of spatial location in political connections

3.8 Summary of Chapter

4 THE VALUE OF CORPORATE POLITICAL CONNECTIONS IN RUSSIA

4.1 Event study methodology

4.1.1 Event studies as a method of evaluating political connections

4.1.2 Calculating abnormal stock returns

4.1.3 Testing the significance of stock market reaction

4.2 Value effects of political connections

4.2.1 The total value of political connections

4.2.2 The value of political connections through directorship

4.2.3 The value of political connections through ownership

4.2.4 The value of political connections in SOEs vs. non-SOEs

4.2.5 The value of political connections before and after

4.2.6 Robustness tests

4.2.6.1 Testing with a control group

4.2.6.2 Testing on a developed stock market

4.3 Summary of Chapter

CONCLUSION

ACKNOWLEDGMENTS

REFERENCES

APPENDIX

Введение диссертации (часть автореферата) на тему «Влияние политических связей на стоимость российских компаний»

INTRODUCTION

Developing and transition economies often do not follow the principles of classical economics. To get a profound understanding of such economies, their deep underlying mechanisms should be studied carefully. A clear example of such a mechanism could be the personal connections of corporate representatives (owners, executive directors, board members) to government officials. Helping firms to get strategic competitive advantages and extract economic rent, p olitical connections1 turn into an alternative to the price mechanism in developing and transition markets. We know that 3% of the world's listed corporations, representing around 8% ofthe world's stock market capitalization, have owners and top officers who have held the highest official posts in the past or present (Faccio, 2006).

Russia is a natural laboratory for exploring the problem of corporate political connections. Being an economy with underdeveloped market mechanisms (Rochlitz, 2014), a weak legal framework (Gans-Morse, 2012), and a high degree of state intervention (Chernykh, 2008), Russia provides excellent institutional conditions for political connections to become a powerful tool for economic rent extraction. With that, the role of corporate political connections in the economy o f Russia is not well-investigated. The few works attempting to evaluate the economic effect of political connections in Russia do not account for possible reverse causal effects of political connections in Russia and their simultaneous nature, focus on certain value-adding and value-destructive effects of political connections rather than their overall effect, or take into consideration narrow groups of stakeholders and politicians (see, e.g., Berkowitz et al., 2014; Klarin & Ray, 2019; Lamberova & Sonin, 2018; Okhmatovskiy, 2010; Szakonyi, 2018).

The objective of this study is to investigate how political connections affect the prospects ofRussian corporations by studying the value effects of corporate political connections.

1 From now on, I use the terms personal political connections, political connections, and corporate political connections as contextual synonyms within this paper.

The research questions of this study are the following:

1) Value of political connections:

- Are corporate political connections beneficial or detrimental for Russ ian co mp anies ?

- What is the total financial effect of political connections?

- Is there any difference between political connections through board members, executives, and owners in terms of the value effect?

2) Distribution of political connections:

- How common are political connections for Russian corporations, and what is the scale of corporate political connections there?

- Has the degree of political connectedness changed over the past 20 years in Russia?

- What is the role of state ownership in political connections?

- Are different sectors of the Russian economy similar or different in terms of political connections?

- Are there any factors that allow predictions on the degree of political connectedness for a Russian company?

The research tasks that have been solved to answer the research question

were:

1) To sum up the academic experience concerning political connections in order to work out a viable research strategy. This involves briefly outlining the research history, highlighting fundamental theories that underpin empirical studies in political connections, explaining basic constructs of studies in political connections, reviewing the current state of the art in empirical research on political connections, and focusing on the institutional settings of Russia in terms of political connections.

2) To come up with a relevant approach to defining, identifying, quantifying, and evaluating corporate political connections tailored to the institutional settings ofRussia.

3) To evaluate the distribution of corporate political connections in Russia, including estimating the scales of political connections and how the degree of political connectedness changed over time in Russia, studying the role of various factors in the distribution of corporate political connections in Russia (including, but not limited to, state ownership, industry affiliation, and spatial location).

4) To estimate how political connections affect the prospects of Russian corporations by means of an event study. This involves evaluating the overall impact of political connections on the value of Russian corporations, studying the value effects of political connections across different groups of stakeholders (namely, owners, executives, and board members), exploring the effect of state ownership on the value of political connections, and estimating how the value effects of political connections evolved over time.

This research represents a study in Institutional Economics at the interface of Finance, Corporate Governance, Political Science, and Law to fill the research gap in existing studies on political connections in Russia by means of:

- Focusing on the overall effect of political connections rather than discrete effects of those.

- Focusing on all relevant types of corporate stakeholders (namely, owners, executives, and board members).

- Addressing the problems ofreverse causality and simultaneity based on event study methodology.

- Considering a broad range of po litical posts.

- Using a voluminous sample that spans 1,739 events of corporate reshuffles in Russia's 204 largest corporations which constitute up to a quarter of the Russian economy.

The main empirical findings of this research are the following (Trifonov, 2020, 2021):

- Based on a unique dataset that embraces almost all listed companies in Russia, this research indicates that around a third of Russia's largest corporations are connected to the top government officials of Russia, confirming the conclusions of the renowned research (Faccio, 2006).

- The degree of political connectedness increased dramatically after the change of political regime from President Yeltsin to President Putin in 1999.

- The most politically connected sectors of the Russian economy are Aviation, Oil & Gas, and Banking.

- Political connections exert a negative impact on firm value, as the competitive advantages of political connections do not effectively offset the opportunity costs of political connections.

- The most detrimental value impact is that of politically connected owners.

- State ownership exacerbates the negative value effects of political connections.

- The negative value effect of political connections strengthened after 2014.

The contributions of this study are the following:

1) The study evaluates the distribution of corporate political connections in Russia in a comprehensive way.

2) The research investigates the overall value effect of corporate political connections in Russia taking into consideration all relevant groups of stakeholders.

3) The paper provides evidence on the differences between politically connected owners, board members, and executives in terms of the value effect.

4) The work shows the limitations ofthe theory ofrent-seeking, the most popular theory used to explain why firms establish political connections. Demonstrating that political connections are widely distributed in Russia

despite their negative value effect, this paper shows that the theory of rent-seeking is not able to explain why political connections are established there.

5) The research proposes a novel conceptual framework for empirical studies in p olitical connections. Although the vast majority of studies in p olitical connections assume that firms establish political connections on their own initiative, this paper demonstrates this is not always true, and governments could play an important part in this process. The paper suggests that the problem of political connections could constitute a complex bilateral process in developing and transition economies, especially post-communist economies noted for the important role played by the government in resource allocation. Focusing on the incentives of both the state and corporations, I suggest that political connectedness could represent a game of two players with conflicting interests over the use of a scarce resource jointly possessed by them. This game results in a current institutional balance between the economic pursuits of corporations, and the political and social goals of the government.

6) The paper proposes that in emerging economies, especially transition economies, corporate political connections can induce a conflict of interests between the government that pursues non-economic purposes, and the shareholders who adhere to value-maximizing behavior. The conflict of interest represents an agency conflict and takes the forms of both the principal-agent conflict when political connections are established at the level of board members and executives, and the principal-principal conflict (the multiple principal problem) when political connections are established on the basis of ownership.

The structure of this paper is the following:

- Chapter 1 describes the state of the art, giving a brief outline of the research history together with a detailed literature review, explaining the

theoretical foundations, and providing an insight into the institutional settings ofRussia in terms of political connections.

- Chapter 2 describes the methodology, focusing on the approach to defining, identifying, and quantifying political connections as well as characterizing the sample.

- Chapter 3 is dedicated to the distribution of political connections. It explains how common are political connections for Russian corporations, how politically connected firms are distributed among industries, and what the latest trends in corporate political connectedness are. Some statistical hypotheses are tested.

- Chapter4 is devoted to the value of corporate political connections in Russia. It explains how political connections affect the procpects of Russian corporations, what the differences between owners, board members, and executives are in terms of the value effects of political connections, and how the value effects of corporate political connections change over time.

Заключение диссертации по теме «Экономика и управление народным хозяйством: теория управления экономическими системами; макроэкономика; экономика, организация и управление предприятиями, отраслями, комплексами; управление инновациями; региональная экономика; логистика; экономика труда», Трифонов Дмитрий Александрович

CONCLUSION

This study identifies how widespread corporate political connections are in Russia, and what impact they exert on firm value, using a sample of Russian companies 2011-2015.

Political connections are common for Russian corporations, and 43% of the Russian companies from my sample were found to be politically connected through ownership or directorship as of 2015. Politically connected companies are unevenly distributed across industries; regulated industries are more heavily politicized. Aviation, Oil & Gas, and Banking are the most politically connected sectors ofthe Russian economy. The differences between SOEs and non-SOEs in terms of political connections have been found significant. The degree of p olitical connectedness ofRussian corporations does not depend on how old the corporation is, nor how distant its headquarters are from the capital (despite the opposite finding in this regard for many other economies).

The results ofthe study show that political connections destroy the value of Russian corporations. Generally, announcements of political connections lead to a statistically significant decline in stock prices by 1.34% within 5 trading days on average. The stock market considers politically connected owners as the most detrimental group of stakeholders in terms of firm valuation, showing a statistically significant drop in stock prices by 1.82% within 5 trading days, and a drop by 4.33% when the politically connected shareholder was an individual. SOEs are more negatively affected by political connections compared to non-SOEs. Politically connected stakeholders show different strengths of impact on SOEs and non-SOEs. The impact of political connections on the value of Russian corporations increased substantially after 2014. The robustness of the results was confirmed through tests on a control group showing that the stock market does not show any statistically significant reaction to non-political appointments.

Considering the total effect of political connections as a form of balance (see §1.3) suggests that the opportunity costs of political connections exceed the economic benefits extracted from those to result in a negative total economic effect

(see §4.2). The stock market encapsulates this information in stock prices to evaluate corporate prospects under the influence of political connections in a negative way.

The study shows a clear limitation of the theory of rent-seeking with regard to emerging markets, especially transition economies. Since Russia represents a good example of a rent-seeking society given its feeble market development (Rochlitz, 2014), weak legislative and judicial framework (Gans-Morse, 2012), and a high degree of government intervention (Chernykh, 2008), the theory of rentseeking suggests corporate political connections should be established there in order to yield economic rent. It makes little sense to establish political connections if those result in a negative economic effect, the theory implies (see Harberger, 1954; Krueger, 1974; Tollison, 1982). However, despite the negative economic effect (see §4.2), political connections are still widely distributed in the corporate environment of Russia (see §3.1). Moreover, the scales of political connections have increased within the timeframe of my analysis (see §3.2) despite the exacerbation in the negative value effects of political connections in that time (see §4.2.5). The theory of rent-seeking is not able to explain this.

Political connectedness in Russia represents a bilateral process in which firms seek to establish connections with the government in order to get competitive advantages, while the government establishes connections with the largest and most profitable companies to control them (see Demidova & Yakovlev, 2014; Frye, 2002; Slinko et al., 2005). It looks like a game of two players with conflicting interests over the use of a scarce resource jointly possessed by them, in which:

- Corporations seek to extract economic rent from the resource of political connections, losing as little corporate power as possible;

- The government strives to control important corporations at a lower opportunity cost ofbenefits forwarded to corporations in exchange for losing corporate control.

From this perspective, the negative economic rent associated with political connections (see §4.2) could show that political connections in Russia are an initiative ofthe government to a higher extent than that of corporations. In other words, the value-maximizing pursuits of corporations do not dominate over the political and social goals ofthe government. Putting it another way, the economic potential ofpolitical connections in Russia might be not operationalized enough.

This picture fits the premises of agency theory more than the theory of rent -seeking. The most popular theoretical foundation exploited in empirical studies on political connections, the theory of rent-seeking does not account for the bilateral nature of political connection in Russia, focusing on the side of corporations and ignoring the side of the government. As a result, the theory makes no allowance for the fact that political connections could be of limited use as an economic asset in post-communist economies, playing another role as prevailing. Providing a powerful conceptual framework for evaluating the economic effect of political connections, the theory fails to explain why political connections are established in Russia given the negative economic rent stemming from them.

Conversely, agency theory takes a broader view of political connections, allowing that they can be an initiative ofthe government (see § 1.2). Representing a scarce resource jointly possessed by the state and the corporation, political connections induce a conflict of interests between the shareholders who adhere to value-maximizing behavior, and the government that pursues political and social goals. This conflict of interests called the agency problem takes the forms of both the principal-agent conflict (the first agency problem) when political connections are established on the level of board members and executives, and the principal-principal conflict (the second agency problem, the multiple principal problem) when political connections are established on the basis of ownership (involving state ownership as well as politically connected individual shareholders).

Agency theory offers not just an explanation for why political connections are established in Russia, but also a (partial) solution to the problem. As we know, agency conflicts in a firm are to be solved by enhancing the system of corporate

governance. International experience broadens the range of possible answers to the question of how to neutralize the negative effects of political connections in Russia. The example of South Korea demonstrates that political connections showed a positive total effect on firm value only after political and economic liberalization (Chung et al., 2019). It is also relevant to mention the renowned Chinese Decree 18 that banned current and former government officials from participation in Chinese corporations (see, e.g., Y. Hu et al., 2020; F. Liu et al., 2018).

Thus, this work adds to the literature arguing that the government's helping hand can also be a grabbing hand (see, e.g., Frye & Shleifer, 1997; Shleifer & Vishny, 1994). Besides, considering the problem of political connections in dynamics, this research corroborates the literature asserting that higher ext ent s of state intervention engender higher scales of political connections (see, e.g., Banerji et al., 2018). And conversely, my results counter the conclusions of the previous literature that investigates the value of political connections under a change of political regimes (see, e.g., Ferguson & Voth, 2008) and show that exacerbations in authoritarian political regimes do not necessarily result in increasing the value of political connections in an economy. From the perspective of rent-seeking, growth in the benefits of political connections typically concomitating exacerbations of authoritarian political regimes could yet accompany incommensurate increases in the opportunity costs of such political connections (e.g., due to economic sanctions, see §4.2.5).

I believe political connections constitute a serious hindrance to the economic development ofRussia. From the perspective of classical economic theory, they foster access to new markets without enhancing the efficiency of production, encourage establishing monopolies on naturally competitive markets, and lead to rising consumer prices (see §1.3). An artificially contrived transfer induced by government action, the surplus of politically connected firms does not appear out of nowhere, but is withdrawn from other producers (and, eventually, consumers) to be used in a Pareto non-efficient way (see Harberger, 1954; Tullock, 1967). In this

sense, political connections in Russia could be rightfully called a wolf in sheep's clothing; hiding behind an illusion of economic development, they destroy firm value, deteriorate market institutions (especially, the institution of competition), induce information asymmetry, and entail a social welfare loss.

Along with other forms ofrent-seeking, political connections lead to a waste of national wealth. According to Krueger, the social loss ofrent-seeking in various parts ofthe Indian public sector made up 7.3% of national income (Krueger, 1974). She also estimated such loss in Turkish import licenses in 1968 to be approximately 15% of GNP (Ibid.). Posner estimated that the opportunity costs of rent-seeking activities constitute roughly 3% of GNP in the USA (Posner, 1975).

I can see two possible limitations ofthis study, namely the limited efficiency of the Russian stock market, and a p otential selection bias problem.

The possibility that the Moscow Stock Exchange is inefficient so that it does not reflect economic signals correctly with stock prices is discussed in §4.2.6.2. To enhance the robustness of my results, I showed that the Frankfurt Stock Exchange, being an efficient stock market, shows the same kind of reaction to political connections of Russian corporations as the Moscow Stock Exchange does. Notably, I preliminarily endeavored to enhance market efficiency within my dataset for the Moscow Stock Exchange in two ways (see §4.1.2). First, I eliminated companies with a share turnover of less than 80 trading days p er year, which is a direct manifestation ofmarket inefficiency. Second, I introduced the 3-day asymmetric event window (days -2 to + 1 around the announcement) to account for information leakage prior to official announcements known to happen in emerging stock markets (Godlewski et al., 2011). To be on the safe side, I am still holding this as a potential limitation of my research, as I have not tested the market efficiency directly.

Although this study deals with the endogeneity discussed in §1.5, it does not solve this problem radically, meaning there might remain some other manifestations of endogeneity. Appointments to boards of directors and executive boards are not random, the same concerns changes in ownership. It means there

could be a selection bias problem. For example, it may be the case that financially distressed firms are more likely to appoint politicians to their boards in order to get bailed out by the government. In such cases, a negative market reaction could, hypothetically, indicate that the company is having hard times rather than the effect of political connections itself. I am struggling to say how relevant this is for Russian corporations. Still, I hold the potential selection bias problem as a possible limitation of this study.

That being said, a selection bias problem could be eliminated from a study in political connections that focuses on the stock market reaction to (sudden) deaths of politicians holding posts in corporations. No doubt, such a study deserves a separate paper. Still, in this thesis, I would like to highlight some cases resembling this. In my database, I managed to discover two instances that appear like this, namely the cases of Valery Musin and Vladimir Skorohodov. According to the methodology (§2.1.2), these persons are treated as politically connected. In both cases, the stock market has shown a positive and statistically significant reaction to the demise of politically connected stakeholders who were top officials ofRussian corporations at the moment oftheir death. Skorohodov died on October 31, 2014, while the chairman ofNLMK. Focusing on the stock market reaction to this single event, I found that the stock price increased by 2.573% within 5 trading days (p -value 0.05) in reaction to his death. Musin passed away on December 22, 2015, while a board member of Gazprom. The stock market responded to this with a growth in stock prices by 1.603% within 5 trading days (p-value 0.1). This is aligned with all my previous results.

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