Review of Quantitative Finance and Accounting

, Volume 53, Issue 4, pp 1099–1133 | Cite as

Political connections and corporate financial decision making

  • Yacine Belghitar
  • Ephraim Clark
  • Abubakr SaeedEmail author
Original Research


This paper investigates whether and how political connections influence managerial financial decisions. Our study reveals that those firms that have a politician on its board of directors are highly leveraged, use more long-term debt, hold large excess cash and are associated with low quality financial reporting compared to their non-connected counterparts. These effects escalate with the strength of the connected politician and whether he or his party is in power. The winning party effect is observed to be stronger than victory by the politician himself. Overall, our paper provides strong evidence that political connection is a two-edged sword. It is indeed a valuable resource for connected firms, but it comes at a cost of higher agency problems.


Political connection Earnings management Financial policies Emerging market 

JEL Classification

G32 G34 O53 


  1. Aggarwal RK, Meschke F, Wang TY (2009) Corporate political contributions: investment or agency? University of Minnesota working paperGoogle Scholar
  2. Ahmed H, Javad A (2009) Dynamics and determinants of dividend policy in Pakistan. Int Res J of Finance Econ 28:56–61Google Scholar
  3. Ahsan T, Wang M, Qureshi MA (2016) Firm, industry, and country level determinants of capital structure: evidence from Pakistan. South Asian J Global Bus Res 5(3):362–384Google Scholar
  4. Anagnostopoulou SC (2013) Cash holdings: determining factors and impact on future operating performance for listed versus unlisted firms. Rev Pac Basin Financ Mark Policies 16(2):1–47Google Scholar
  5. Anwar Z, Afza T (2014) Impact of terrorism, gas shortage and political instability on FDI inflows in Pakistan. Sci Int 26(1):507–511Google Scholar
  6. Ashraf J, Ghani W (2005) Accounting development in Pakistan. Int J Acc 40:175–201Google Scholar
  7. Batta GE, Heredia RS, Weidenmier W (2014) Political connections and accounting quality under high expropriation risk. Eur Acc Rev 23(4):485–517Google Scholar
  8. Belghitar Y, Clark E (2014) The effect of option based managerial compensation on corporate cash holdings. J Financ Res 37(2):191–210Google Scholar
  9. Belghitar Y, Khan J (2013) Governance mechanisms, investment opportunity set and SMEs cash holdings. Small Bus Econ 40(1):59–72Google Scholar
  10. Ben-Nasr H, Boubakri N, Cosset JC (2015) Earnings quality in privatized firms: the role of state and foreign owners. J Acc Public Policy 34:392–416Google Scholar
  11. Berger P, Ofek E, Yermack D (1997) Managerial entrenchment and capital structure decisions. J Finance 52:1411–1438Google Scholar
  12. Bertrand M, Kramarz F, Schoar A, Thesmar D (2018) The cost of political connections. Rev Financ 22(3):849–876Google Scholar
  13. Boubakri N, Cosset J, Walid S (2008) Political connections of newly privatized firms. J Corp Finance 14:654–673Google Scholar
  14. Boubakri N, Ghoul SE, Saffar W (2013) Cash holdings of politically connected firms. J Multinatl Financ Manag 23:338–355Google Scholar
  15. Bunkanwanicha P, Wiwattanakantang Y (2009) Big business owners in politics. Rev Financ Stud 22(6):2133–2168Google Scholar
  16. Calf JL (1994) The relationship between firm size and export behavior revisited. J Int Bus Stud 25(2):367–387Google Scholar
  17. Campbell JY (1996) Understanding risk and return. J Pol Econ 104(2):298–345Google Scholar
  18. Chaney P, Faccio M, Parsley D (2011) The quality of accounting information in politically connected firms. J Acc Econ 51:58–76Google Scholar
  19. Charumilind C, Kali R, Wiwattanakantang Y (2006) Connected lending: Thailand before the financial crisis. J Bus 79(1):181–218Google Scholar
  20. Chava S, Purnanandam A (2010) CEOs versus CFOs: incentives and corporate policies. J Financ Econ 97:263–278Google Scholar
  21. Chen L, Zhao X (2006) On the relation between the market-to-book ratio, growth opportunity, and leverage ratio. Finance Res Lett 3(4):253–266Google Scholar
  22. Chen KCW, Chen Z, Wei KCJ (2011) Agency costs of free cash flow and the effect of shareholder rights on the implied cost of equity capital. J Financ Quant Anal 46:171–207Google Scholar
  23. Claessens S, Feijen E, Laeven L (2008) Political connections and preferential access to finance: the role of campaign contributions. J Financ Econ 88(3):554–580Google Scholar
  24. Datta S, Datta M, Singh V (2013) Product market power, industry structure, and corporate earnings management. J Bank Finance 37(8):3273–3285Google Scholar
  25. Dejong D, Ling Z (2013) Managers: their effects on accruals and firm policies. J Bus Finance Acc 40(1–2):82–114Google Scholar
  26. Desai RM, Olofsgard A (2011) The costs of political influence: firm-level evidence from developing countries. Q J Polit Sci 6:137–178Google Scholar
  27. Dinç IS (2005) Politicians and banks: political influences on government-owned banks in emerging markets. J Financ Econ 77(2):453–479Google Scholar
  28. Ding S, Jia C, Wilson C, Wu Z (2015) Political connections and agency conflicts: the roles of owner and manager political influence on executive compensation. Rev Quant Finance Acc 45(2):407–434Google Scholar
  29. Dittmar A, Mahrt-Smith J (2007) Corporate governance and the value of cash holdings. J Financ Econ 83:599–634Google Scholar
  30. Dittmar A, Mahrt-Smith J, Servaes H (2003) International corporate governance and corporate cash holdings. J Financ Quant Anal 38:111–133Google Scholar
  31. Ebrahim MS, Girma S, Shah EM, Williams J (2014) Dynamic capital structure and political patronage: the case of Malaysia. Int Rev Financ Anal 31:117–128Google Scholar
  32. Faccio M (2006) Politically connected firms. Am Econ Rev 96(1):369–386Google Scholar
  33. Faccio M (2010) Differences between politically connected and non-connected firms: a cross country comparison. Financ Manag 39:905–927Google Scholar
  34. Fan JPH, Oliver MR, Zhao M (2008) Public governance and corporate finance: evidence from corruption cases. J Comp Econ 36(3):343–364Google Scholar
  35. Ferris SP, Houston R, Javakhadze D (2016) Friends in the right places: the effect of political connections on corporate merger activity. J Corp Finance 41:81–2012Google Scholar
  36. Frank MZ, Goyal V (2005) Trade-off and pecking order theories of debt. In: Handbook of empirical corporate finance, vol 2, chapter 12, pp 135–202Google Scholar
  37. Frank MZ, Goyal V (2009) Capital structure decisions: Which factors are reliably important? Financ Manag 38(1):1–37Google Scholar
  38. Fraser DR, Zhang H, Derashid C (2006) Capital structure and political patronage: the case of Malaysia. J Bank Finance 30(4):1291–1308Google Scholar
  39. Godfrey P (2005) The relationship between corporate philanthropy and shareholder wealth: a risk management perspective. Acad Manag Rev 30(4):777–798Google Scholar
  40. Goldman E, Rocholl J, So I (2009) Do politically connected boards affect firm value? Rev Financ Stud 22(6):2331–2360Google Scholar
  41. Hameed SA, Tariq YB, Jadoon IA (2013) Corporate governance in financial sector companies of Pakistan: current state and room for improvement. World Appl Sci J 21(1):79–92Google Scholar
  42. Harford J, Mansi SA, Maxwell WF (2008) Corporate governance and firm cash holdings in the US. J Financ Econ 87(3):535–555Google Scholar
  43. Hazarika S, Karpoff JM, Nahata R (2012) Internal corporate governance, CEO turnover, and earnings management. J Financ Econ 104:44–69Google Scholar
  44. Heckman J (1979) Sample selection bias as a specification error. Econometrica 47:153–161Google Scholar
  45. Hill MD, Fuller KP, Kelly GW, Washam JO (2014) Corporate cash holdings and political connections. Rev Quant Finance Acc 42(1):123–142Google Scholar
  46. Husain I (2012) Governor of the State Bank of Pakistan, reproduced from Blue Chip. The Business People’s Magazine, Fort WayneGoogle Scholar
  47. Infante L, Piazza M (2010) Do political connections pay off? Some evidences from the Italian credit market. Bank of Italy, economics, research and international relations area working paper seriesGoogle Scholar
  48. International Business Promotion (2015) Pakistan: doing business and investing in Pakistan: strategic, practical information, regulations, contacts. World Business and Investment Library, Publisher, Morrisville. ISBN 1514527472Google Scholar
  49. International Monitory Fund (2016) Bank non-performing loans to total gross loans %. Accessed 21 Apr 2017
  50. Jamal N (2015) Need for a bankruptcy law. Dawn. Accessed 15 Apr 2017
  51. Javid A (2010) Corporate governance in Pakistan: corporate valuation, ownership and financing. Pakistan Institute of Development Economics working paper 2010, p 57Google Scholar
  52. Javorcik BS, Spatareanu M (2011) Does it matter where you come from? Vertical spillovers from foreign direct investment and the origin of investors. J Dev Econ 96(1):126–138Google Scholar
  53. Jensen M (1986) Agency costs of free cash flow, corporate finance and takeovers. Am Econ Rev 76:323–329Google Scholar
  54. Jiraporn P, Chintrakrn P, Liu Y (2012) Capital structure, CEO dominance, and corporate performance. J Financ Serv Res 42(3):139–158Google Scholar
  55. John K, Litov L (2010) Corporate governance and financing policy: new evidence. In: AFA 2006 Boston meetingsGoogle Scholar
  56. Kapfer S (2006) Multinational corporations and the erosion of state sovereignty. In: Paper prepared for Illinois State University Illinois State University conference. Illinois State University. Accessed 15 Jan 2018
  57. Khan WM (2018) SBP autonomy and monetary policy—V, business recorder, 7th February 2018. Accessed 01 May 2018
  58. Khan A, Mihret DG, Muttakin MB (2016) Corporate political connections, agency costs and audit quality. Int J Acc Inf Manag 24(4):357–374Google Scholar
  59. Khanna T, Palepu K (2000) The future of business groups in emerging markets: long-run evidence from Chile. Acad Manag J 43(3):268–285Google Scholar
  60. Khwaja AI, Mian AR (2005) Do lenders favor politically connected firms? Rent provision in an emerging financial market. Q J Econ 120(4):1371–1411Google Scholar
  61. Kimura F, Kiyota K (2007) Foreign-owned versus domestically-owned firms: economic performance in Japan. Rev Dev Econ 11(1):31–48Google Scholar
  62. Kostovetsky L (2015) Political capital and moral hazard. J Financ Econ 116(1):144–159Google Scholar
  63. Kothari S, Leone A, Wasley C (2005) Performance-matched discretionary accrual measures. J Acc Econ 39:163–197Google Scholar
  64. Kundi I (2017) Tariq Bajwa new SBP governor amid autonomy concerns. The Nation, 08 July 2017. Accessed 24 Apr 2018
  65. Kusnadi Y (2011) Do corporate governance mechanisms matter for cash holdings and firm value? Pac Basin Finance J 19(5):554–570Google Scholar
  66. Lee W, Wang L (2017) Do political connections affect stock price crash risk? Firm-level evidence from China. Rev Quant Financ Acc 48(3):643–676Google Scholar
  67. Leuz C, Oberholzer-Gee F (2006) Political relationships, global financing, and corporate transparency: evidence from Indonesia. J Financ Econ 81(2):411–439Google Scholar
  68. Mobarak AM, Purbasari DP (2006) Corrupt protection for sale to firms: evidence from Indonesia. Unpublished working paper, University of Colorado at BoulderGoogle Scholar
  69. Modigliani F, Miller MH (1958) The cost of capital, corporate finance and the theory of investment. Am Econ Rev 48:261–297Google Scholar
  70. Moosa I, Li L (2012) Firm-specific factors as determinants of capital structure: evidence from Indonesia. Rev Pac Basin Financ Mark Pol 15:1150007–1150017Google Scholar
  71. Muttakin MB, Monem RM, Khan A, Subramaniam N (2015) Family firms, firm performance and political connections: evidence from Bangladesh. J Contemp Acc Econ 11(3):215–230Google Scholar
  72. Myers S (1977) Determinants of corporate borrowings. J Financ Econ 5:147–175Google Scholar
  73. Myers SC, Majluf NS (1984) Corporate financing and investment decisions when firms have information that investors do not have. J Financ Econ 13(2):187–221Google Scholar
  74. Naeem S, Nasr M (2007) Dividend policy of Pakistani firms; trends and determinants. Int Rev Bus Res 3(3):242–254Google Scholar
  75. Oberman WD (2004) A framework for the ethical analysis of corporate political activity. Bus Soc Rev 109:245–262Google Scholar
  76. Opler T, Pinkowitz L, Stulz R, Williamson R (1999) The determinants and implications of cash holdings. J Financ Econ 52:3–46Google Scholar
  77. Ozkan A, Ozkan N (2004) Corporate cash holdings: an empirical investigation of UK companies. J Bank Finance 28:2103–2134Google Scholar
  78. Pan X, Tian GG (2018) Bank work experience versus political connections: which matters for bank loan financing. Int Rev Finance. CrossRefGoogle Scholar
  79. Park YW, Shin HH (2004) Board composition and earnings management in Canada. J Corp Finance 10:431–457Google Scholar
  80. Rajan RG, Zingales L (1995) What do we know about capital structure? Some evidence from International data. J Finance 50(5):1421–1460Google Scholar
  81. Rehman UR (2006) Who owns Pakistan, 5th edn. Mr. Books (Pvt.) Ltd, IslamabadGoogle Scholar
  82. Saeed A, Belghitar Y, Clark E (2014) Theoretical motives of corporate cash holdings and political connections: firms level evidence from a developing economy. Int Rev Appl Econ 28(6):813–831Google Scholar
  83. Saeed A, Belghitar Y, Clark E (2015) Political connections and firm leverage: firm level evidence from Pakistan. Manag Decis Econ 36(6):364–383Google Scholar
  84. Scherr FC, Hulburt HM (2001) The debt maturity structure of small firms. Financ Manag 30:85–111Google Scholar
  85. Shah SH, Ahmad MH, Ahmed QM (2016) The nexus between sectoral FDI and institutional quality: empirical evidence from Pakistan. Appl Econ 48(17):1591–1601Google Scholar
  86. Shakeel A (2018) The state of Pakistani democracy. Berkley Polit Rev. Accessed 7 Mar 2018
  87. Shen C, Lin C (2016) Political connections, financial constraints, and corporate investment. Rev Quant Finance Acc 47(2):343–368Google Scholar
  88. Singh M, Davidson W III (2002) Agency costs, ownership structure and corporate governance mechanisms. J Bank Finance 27:793–816Google Scholar
  89. State Bank of Pakistan (2017) Statistics on scheduled Banks in Pakistan. Accessed 26 Apr 2018
  90. Stevenson M (2003) UN countries reveal costs of corruption. Global Policy Forum. Accessed 6 May 2018
  91. Su Z, Fung H (2013) Political connections and firm performance in Chinese companies. Pac Econ Rev 18:283–317Google Scholar
  92. Walsh EJ, Ryan J (1997) Agency and tax explanations of security issuance decisions. J Bus Finance Acc 24(7/8):943–961Google Scholar
  93. Wang D, Ma G, Song X, Liu Y (2016) Political connection and business transformation in family firms: evidence from China. J Fam Bus Strateg 7(2):117–130Google Scholar
  94. Wernerfelt B (1984) A resource-based view of the firm. Strateg Manag J 5:171–180Google Scholar
  95. World Justice Project (2016) WJP rule of law index-2016. Accessed 28 Apr 2017
  96. Wu W, Wu C, Rui OM (2012) Ownership and the value of political connections: evidence from China. Eur Financ Manag 18:695–729Google Scholar
  97. Xu H, Dao M, Wu J (2018) The effect of local political corruption on earnings quality. Rev Quant Finance Acc. CrossRefGoogle Scholar
  98. Zaheer F (2016) FDI in Pakistan down massive 45% in Jul–Nov, Tribune. Accessed 1 May 2017
  99. Zwiebel J (1994) Dynamic capital structure under managerial entrenchment. Working paper, Graduate School of Business, Stanford UniversityGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Cranfield UniversityCranfieldUK
  2. 2.Middlesex UniversityLondonUK
  3. 3.COMSATS UniversityIslamabadPakistan

Personalised recommendations