Board political connections and financial fraud: The case of business groups in South Korea

Abstract

Are business groups more likely to commit financial fraud when they are politically connected? Many past studies and anecdotal evidence have pointed out that business groups may behave more opportunistically when they are politically connected. However, the nature of the business group-government relationship evolves amid governance reform in many countries, making it difficult for business groups to abuse their political connections. In this research, we examine the business group-government relationship through the lens of social exchange and find a deterring effect of political connections on a connected business group’s propensity to commit fraud. Our results indicate that business groups are less likely to commit financial fraud when the extent of their political connection is high. By doing so, politically connected firms can prove themselves as legitimate business partners for the government and can more effectively secure a position to leverage their political connections. We additionally find that such an exchange relationship is weakened under a business group-unfriendly government due to their hostile relationships.