Do Strong Corporate Governance Firms Still Require Political Connection? And Vice Versa? By Chung-Hua Shen, Yu-Chun Wang, and Chih-Yung Lin Discussed by Yenn-Ru Chen, National Cheng Kung University NTUICF 2012

Quick Summary Research Question: whether corporate governance and political connection are substitute or complement for a firm’s bank loan financing? Findings: Corporate governance (CG) and political connection (PC) are substitute for each other when firms undertake the bank loan contracts. The loan terms would be better for firms with better corporate governance or those with higher political connection. However, the favorable term would be decrease (substitute effect) when firms undertake high corporate governance and political connection simultaneously.

Comments It is an interesting issue to discuss the impact of political connection on the choice of corporate governance and provide policy implications The authors provide solid empirical test and robustness check. Good writing. Easy to read.

Comments The scope of title might be too broad to specifically represent what this study focus on. Motivation: It’s unclear why the author using the bank loan terms examines the relationship between CG and PC. Why need to know? The favorable terms of loan contracts are the consequence of CG and PC, but not necessary the purpose of establishing good governance or political connections. In this case, what make this research important? Again, receiving the favorable terms of loans is not necessary the main objective of building up the governance and political connection. Why would they be a substitute?

Comments Theory: Whether the negative relationship necessarily demonstrates the substitute impact? The fundamental theories of CG and PC on bank loan terms seem different and the theory for the interaction between CG and PC seem indistinct. The bank loan terms might be decided based on a firm’s likelihood of default risk. Firms with better CG are might obtain the lower spread by reducing the risk due to the less information asymmetry or higher profitability. However, the favorable loan terms for firms with good PC might be just because of the benefit of this connection, rather than reducing the default risk. In that case, it may not appropriate to conclude that the negative relation between CG and PC is substitutive effect. About the reference for hypothesis 1a, the focus of inference should be on the bank rather than bondholders. The function and the impact of banks and the bondholders on firm activities might be different. – For example, banking system has its monitoring and screening mechanism, which bondholders might not have. Thus, using bond studies to inference the role of on bank loan might ignore the specific impact of bank loan on the firm.