Political connections and organisational performance: evidence from Pakistan

• DOI: https://doi.org/10.1108/IJAIM-05-2016-0053
• Published date: 03 October 2016
• Pages: 321-338
• Date: 03 October 2016
• Author: Moeen Umar Cheema,Rahat Munir,Sophia Su
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Political connections and

organisational performance:

evidence from Pakistan

Moeen Umar Cheema, Rahat Munir and Sophia Su

Department of Accounting and Corporate Governance,

Macquarie University, Sydney, Australia

Abstract

Purpose – This paper aims to investigate the association between political connections (PCs) and

organisational performance in a South Asian country, Pakistan.

Design/methodology/approach – Data were collected for 250 non-nancial organisations listed on

the Karachi Stock Exchange of Pakistan. Multiple linear regression analysis was used to empirically

test the research question.

Findings – PCs in Pakistan are common across all industries. The study found a signicantly negative

effect of PCs on organisational performance, measured in terms of return on assets and return on equity.

In addition, negative association of PCs with organisational performance is more pronounced for

organisations having connections with politicians, compared to those having connections with former

government ofcials.

Originality/value – The study extends the PCs literature by providing evidence of the impact of PCs

on organisational performance in a South Asian country. Several implications for organisations, banks,

accounting professionals and policy-makers are provided.

Keywords Pakistan, Organisational performance, Political connections, Return on equity,

Return on assets

Paper type Research paper

1. Introduction

The purpose of this study is to examine the association between political connections

(PCs) of business organisations in Pakistan and organisational performance in terms of

return on assets (ROA) and return on equity (ROE), with a signicantly negative

association identied. PCs are established by business organisations in several ways.

For example, business owners establish relationships with politicians through lobbying

(Blau et al., 2013), campaign contributions (Correia, 2014), friendships and family and

social networking (Bliss and Gul, 2012a) or they opt to enter into politics

(Bunkanwanicha and Wiwattanakantang, 2008). Alternatively, businesses appoint

former and/or current politicians and (former) top government ofcials on their boards

of directors to obtain benets from their current and/or former connections (Jackowicz

et al., 2014;Su et al., 2013). This study follows Faccio (2006) to dene an organisation as

politically connected if any one of its top ofcers or a large shareholder or one of their

close friends/family members has been either a parliamentarian or a top government

ofcer.

Prior literature provides conicting evidence regarding the impact of PCs on

organisational performance. While most studies have documented a positive impact of

The current issue and full text archive of this journal is available on Emerald Insight at:

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Political

connections

321

Received 10 May 2016

Revised 5 June 2016

Accepted 22 June 2016

InternationalJournal of

Accounting& Information

Management

Vol.24 No. 4, 2016

pp.321-338

©Emerald Group Publishing Limited

1834-7649

DOI 10.1108/IJAIM-05-2016-0053

PCs on organisational performance, some others have provided contrasting evidence.

For instance, evidence suggests that politically connected organisations (PCOs) receive

more government subsidies (Wu et al., 2012a), have greater access to credit (Claessens

et al., 2008;Li et al., 2008), pay lower cost of debt (Houston et al., 2014) and equity capital

(Boubakri et al., 2012b) and have more chances of being bailed out in case of nancial

distress (Blau et al., 2013). Further, PCOs receive preferential treatment in procurement

of government contracts (Goldman et al., 2013), have greater market shares (Faccio,

2010), show signicantly higher performance (Boubakri et al., 2012a;Wu et al., 2012b;

Faccio, 2006) and their nancial leverage and long-term debt and ROA increase after the

establishment of their PC (Boubakri et al., 2012a).

On the contrary, some studies show that PCOs have higher cost of debt (Bliss and

Gul, 2012a), greater likelihood of reporting negative equity (Bliss and Gul, 2012b), lower

sales growth, lower earnings growth and lower return on sales (Jackowicz et al., 2014;

Fan et al., 2007). Further, PCOs have signicantly lower ROA (Faccio, 2010) and pay

lower dividends (Mohamed et al., 2007). These conicting ndings regarding the impact

of PCs on organisational performance are puzzling and signicantly affect our

understanding of the role of PCs in business organisations.

A review of literature suggests that a number of studies (Faccio, 2010;Boubakri et al.,

2008;Faccio, 2006) have adopted a cross-country approach to examine PCOs. There are,

however, large differences among countries in terms of nature and type of PCs,

socio-political settings, governance mechanisms and cultural dimensions. Motivated by

these differences, which make cross-country comparisons difcult and often

impractical, several studies have adopted a single-country specic approach to

investigate the impact of PCs on business organisations. These single country-specic

studies, however, have mostly focused on the USA (Correia, 2014;Houston et al., 2014),

some European countries including Germany, France, Poland, Spain and Italy

(Jackowicz et al., 2014;Ferguson and Voth, 2008;Bertrand et al., 2006) and some Asian

countries.

In the Asian region, research on PCs has focused mostly on East Asian countries such

as Japan (Dow and McGuire, 2009), Indonesia (Leuz and Oberholzergee, 2006), Malaysia

(Bliss and Gul, 2012a,2012b;Mohamed et al., 2007), Thailand (Bunkanwanicha and

Wiwattanakantang, 2008) and China (Su et al., 2013;Fan et al., 2007). There is, however,

little research on PCs in the South Asian region, with the exception of Khwaja and Mian

(2005b) which is limited to examining the association between PCs and access to credit

in Pakistan. Hence, this study attempts to ll this gap in the literature by investigating

the impact of PCs on organisational performance by taking a sample of 250

organisations listed on the Karachi Stock Exchange of Pakistan (KSE).

The study nds that PCs have a signicantly negative impact on organisational

performance (measured in terms of ROA and ROE) in Pakistan. This negative impact is

more pronounced for organisations having connections with prominent politicians. The

study contributes to the PCs literature in several ways. First, it is the rst single-country

specic study which investigates the impact of PCs on organisational performance in a

South Asian country i.e. Pakistan. Second, the results of the study help to address the

mixed ndings of previous literature by providing evidence of the impact of PCs on

organisational performance in an environment characterised by political instability,

high level of corruption and a weak regulatory environment. The ndings of the study

can be generalised to other countries with similar socio-economic, political and

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