Are political connections beneficial or harmful toward firms’ performance? A meta-analysis approach

• DOI: https://doi.org/10.1108/CG-07-2021-0256
• Published date: 01 December 2021
• Date: 01 December 2021
• Pages: 901-921
• Subject Matter: Strategy,Corporate governance
• Author: Khusnul Prasetyo,Damai Nasution

Are political connections benef‌icial or

harmful toward f‌irms’performance?

A meta-analysis approach

Khusnul Prasetyo and Damai Nasution

Abstract

Purpose –This study aimsto reconcile conflicting empirical resultsfrom prior studies on the association

between political connections (PCs) and firms’ performance. Furthermore, it investigates whether the

contradictory findings were moderated by the different types of both PCs and firms’ performance

measures. Thisstudy also makes a cross-country comparison ofthe empirical evidence to provide more

insight.

Design/methodology/approach –This study used meta-analysis to integrate the previous studies’

findings onthe association between PCs and firms’ performanceand further investigatedthe moderators

of such association.

Findings –The findings show thatPCs have a positive association with firms’ performance. Thisresult is

apparent forboth democratic and authoritariancountries, which suggests PCs’ beneficialconsequences

toward firms’ performance should not be disregarded in both contexts. This study also finds PCs and

firms’performance measures moderate the associationbetween PCs and firms’ performance.

Originality/value –This study contributes to the stream of research that investigates the association

between PCs and firms’ performance. To the best of our knowledge, it is among the first to implement

statistical meta-analysis on the aforementioned literature while incorporating a cross-country

comparison.

Keywords Meta-analysis, Political connections, Firms’ performance

Paper type Research paper

1. Introduction

Political connections (PCs) have become one of the fascinating topics in corporate

governance research. Prior studies seem unable to consistently conclude whether having

PCs on board is beneficial or harmful toward firms’ performance (Fan et al., 2007;Wu et al.,

2012). PCs have been proven to have a positive association toward performance or firm value

(Azmi et al.,2020;Joni et al., 2020), especially for fami ly firms (Harymawan et al.,2019;

Muttakin et al., 2015;Wati et al.,2019) and they are also associated with a lower cost of debt

(Bliss et al., 2018;Khwaja and Mian, 2005;Yang et al., 2012), as well as access to

government subsidies or bailout programs (F accioet al ., 2006). Politically connected officials’

resignation has also been shown to be detrimental to firms’ performance (Aldhamari et al.,

2020;Chen et al., 2020;Chong et al., 2018;Proenc¸a et al., 2020;Ren et al.,2020), which

further highlights the positive impact of having PCs. On the other hand, other studies have

documented that PCs harm firms’ performance (Azmi et al., 2020;Ha and Fro

¨mmel, 2020;Wu

et al., 2012). These results highlight PCs’ inconclusive nature, whether they are beneficial or

harmful toward firms’ performance.

The ambiguity of these results has led many researchers to view PCs both as blessings and

curses. Firms may risk damaging their value and performance when they cannot take full

Khusnul Prasetyo and

Damai Nasution are both

based at the Department of

Accountancy, Faculty of

Economics and Business,

Airlangga University,

Surabaya, Indonesia.

Received 10 July 2021

Revised 22 September 2021

Accepted 2 November 2021

The authors appreciate the

valuable comments from

Gabriel Eweje (editor-in-chief),

Masahiro Hosoda (associate

editor), and two anonymous

reviewers.

DOI 10.1108/CG-07-2021-0256 VOL. 22 NO. 5 2022, pp. 901-921, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 901

advantage of resources that government officials or political figures may offer. If their

presence cannot add meaningfulvalue and primarily engage in rent-seeking behavior,it will

unquestionably deteriorate the performance (Boubakri et al.,2005;Faccio, 2006;Krueger,

1974). These benefits may or may not exceed the aforementioned risk and cost (Krueger,

1974), and thus might be reflected inthe conflicting empirical results. Furthermore, Krueger

(1974) and Faccio (2006) posit that firms in less developed countries, where there is a lack

of law, finance and capital market development, as well as higher corruption levels, might

increase the prevalence of PCs in both public and private firms and its positive impact

toward firms’ performance. These factors may also explain the discrepancies in PCs

research empirical findings.

Both the contradicting findings of prior research and the difference of firms’ performance

measures are the primary motivation to conduct this research. The approach selected and

the result of this study should be able to reconcile and synthesize a more meaningful

understanding of the association of PCs and firms’ performance. The meta-analysis

approach allows the researcher to elucidate inconsistent and often contradictory findings

from one to another (Allen, 2017;Bing et al., 2011;Hunter et al.,1982;Hunter and Schmidt,

2004;Lohwasser et al.,2021). This study will extract statistical output from relevant studies

to obtain effect size estimation (Hunter et al.,1982;Hunter and Schmidt, 2004) and finally

create a general conclusion on PCs’ impact on firm performance. This study also examines

whether the contradicting results are caused by variation of measures both in PCs and

firms’ performance. This type of analysis can be used to see whether the moderating

variables, in this case, the measures, cause these contradictory results (Allen, 2017;Bing

et al.,2011

;Hunter et al.,1982;Hunter and Schmidt, 2004;Lohwasser et al., 2021).

The relationships between Firms’ performance and PCs’ are among several developing

governance research issues. Other than PCs, previous studies have investigated the

relationships between firms’ performance and several corporate-government-related factors,

such as governance mechanism and structure (Da ryaei and Fattahi, 2020;Gama and

Galva

˜o, 2012;Nizaeva and Uyar, 2017;Potharla and Amirishetty, 2021) and Z hang et al.,

2018); remuneration plan (Dias et al.,2020;Pass, 2003); corporate events as (Funchal and

Pinto, 2020); board diversity (Ullah et al., 2020); and gender diversity (Leyva-Townsend et al.,

2021). The above-mentioned factors are widely considered good governance practices. At

the same time, PCs are commonly perceived as not necessarily good because firms may opt

to have PCs to get preferential treatments from the government, for instance (Faccio, 2006).

Firms with PCs materialize when significant shareholders, with a minimum of 10% of shares

or one of its board members is the current president, prime minister, minister, parliamentary

member or government officials (Faccio, 2006). This definition may not be precisely correct

in an authoritarian country such as China, where former government officials, former

members of parliament or former military officials may still have significant political power.

Research investigating PCs’ impact on performance in more authoritarian settings usually

prefers to perceive both current and former political figures as a sign of having PCs (Guo

et al.,2021

;Ma et al., 2016;Sun and Ai, 2020;Wang et al., 2021). Most contemporary PCs

research has used this approach.

Prior studies opted to use two categories of firms’ performance or firm value measures,

accounting-based performance measures and market-based performance measures.

Researchers who decided to use accounting performance perceived this type of measure

as the fundamental performance of the firms. Two primarily used accounting-based

measures in the previous researchreturn on assets (ROA), as seen in Wu et al. (2018),Azmi

et al. (2020),Carney et al. (2020),Idris et al. (2020) and Dai and Xu (2021) and return on

equity (ROE) as used in Niessen and Ruenzi (2010). Those who decided to apply market-

based performance see this measure as the actual economic performance which the

shareholders will enjoy. This study does not rigidly differentiate between firm performance

and firm value. Hence, both are regarded as firms’ performance. Two mainly used market-

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