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This study investigates the impact of political connections on the awarding of government contracts to Canadian companies. Two-stage least squares (2SLS) analyses were performed on a sample of S&P/TSX companies from 2010 to 2014 inclusively. The results show that political connections are positively and significantly associated with the winning of government contracts. Politically connected firms obtain more government contracts and higher contract values than non-connected firms. Political connections thus appear to be directly associated with securing government contracts in the Canadian context. Firms can view political connections as a non-market, long-term strategy to help them gain competitive advantages and improve their performance. Accordingly, they tend to appoint directors and managers taking these connections and the advantages that can be gained into account. However, they must seriously consider the cost-benefit ratio of this strategy. For example, the costs incurred could be ethical in nature and firms could find themselves in a position of conflict of interest that could lead to extensive negative media exposure. These results alert regulatory and governmental organizations to the need for them to remain vigilant and to strengthen corporate governance regulations to prevent the excesses and abuses that could arise from firms’ political actions. Our study is the first to demonstrate a direct relationship between corporate political connections and government contracts in the Canadian context. The results confirm the growing interdependence between politics and business, particularly the increase in the number of corporate actions intended to influence government decisions.
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International Journal of Economics and Finance; Vol. 8, No. 2; 2016
ISSN 1916-971X E-ISSN 1916-9728
Published by Canadian Center of Science and Education
19
Firms Political Connections and Winning Government Contracts
Saidatou Dicko1
1 Accounting Departement, School of Management, Université du Québec à Montréal, Montreal, Canada
Correspondence: Saidatou Dicko, Accounting Departement, School of Management, Université du Québec à
Montréal, Montreal, Quebec., H2X 3X2, Canada. Tel: 1-514-987-3000 ext. 3848. E-mail:
saidatou.hamidou_dicko@uqam.ca
Received: November 26, 2015 Accepted: December 8, 2015 Online Published: January 25, 2016
doi:10.5539/ijef.v8n2p19 URL: http://dx.doi.org/10.5539/ijef.v8n2p19
Abstract
This study investigates the impact of political connections on the awarding of government contracts to Canadian
companies. Two-stage least squares (2SLS) analyses were performed on a sample of S&P/TSX companies from
2010 to 2014 inclusively. The results show that political connections are positively and significantly associated
with the winning of government contracts. Politically connected firms obtain more government contracts and
higher contract values than non-connected firms. Political connections thus appear to be directly associated with
securing government contracts in the Canadian context. Firms can view political connections as a non-market,
long-term strategy to help them gain competitive advantages and improve their performance. Accordingly, they
tend to appoint directors and managers taking these connections and the advantages that can be gained into
account. However, they must seriously consider the cost-benefit ratio of this strategy. For example, the costs
incurred could be ethical in nature and firms could find themselves in a position of conflict of interest that could
lead to extensive negative media exposure. These results alert regulatory and governmental organizations to the
need for them to remain vigilant and to strengthen corporate governance regulations to prevent the excesses and
abuses that could arise from firms political actions. Our study is the first to demonstrate a direct relationship
between corporate political connections and government contracts in the Canadian context. The results confirm
the growing interdependence between politics and business, particularly the increase in the number of corporate
actions intended to influence government decisions.
Keywords: Canadian, firms, government contracts, performance, political connections, S&P/TSX
1. Introduction
Firms need key resources to maintain their profitability and growth. According to resource dependence theory,
they have to connect to the external environment to access the resources they require, which can be
accomplished through a variety of means. Political connections are one of the most important of these means.
The past decade has seen various studies on the role and impact of corporate political connections in different
countries (Goldman, Rocholl, & So, 2009; Goldman, Rocholl, & So, 2013; Houston, Jiang, Lin, & Yuema, 2014;
Yan, Wilson, & Wu, 2014). These studies focus mainly on firms financial performance. Research conducted in
Canada has shown that political connections positively influence the financial performance of firms (Dicko &
Khemakhem, 2015), although little is known about how political connections help them gain access to external
resources.
According to Dicko (2011), firms sometimes use directors social connections to access different types of
resources, which could be financial (bank financing), commercial (new contracts), informational, or
expertise-related. The current study will examine a different type of asset, i.e. political connections, to determine
whether they help Canadian firms obtain government contracts.
Why study government contracts in particular? Because government is the construction industrys most
important client in Canada and companies go to great lengths to win government contracts. It is thus important to
investigate the relationship between firms political connections and their ability to win specific contracts. It is
also of interest for society and government to understand how companies can influence decision-making in the
government procurement process.
Numerous studies have been carried out in the United States to identify and analyse the determinants of firms
political activities, which include contributions to political action committees, lobbying, soft money
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contributions, and advocacy advertising. Defined as “any deliberate firm action intended to influence
governmental policy or process” (Getz, 1997, p. 32), firms political activities or actions have been theoretically
recognized as non-market strategies that can help shape their relationships with government, influence
government policies, and achieve competitive advantages (Hadani, 2007). Despite the extent of studies
conducted, little is known about the empirical use of political connections by firms. It is therefore extremely
important to investigate the direct and empirical link between firms political activities and the benefits they can
provide.
For S&P/TSX companies, our findings show that political connections positively and significantly influence the
ability of non-financial firms to win government contracts. We were thus able to confirm our hypotheses. Our
study is therefore the first to make an empirical link between a firms having political connections and using
them effectively. These results constitute an appeal to regulatory and government organizations since they
confirm the need for them to review their regulations and processes.
2. Business Resource Dependence and Social Connections
Firms are primarily social institutions that have a social contract with society as a whole. This contract allows
them to use collective resources within the limits of the law to create and effectively disseminate wealth,
supposedly in proportion to participation in the production process or the value of each production factor on a
market. However, with the expansion of globalization and competition, each company now constantly faces
significant challenges that can affect its growth and sustainability. Firms continually need to renew themselves,
and to do so, they have to rely on their environmental resources. Yet these resources can become scarce when
new players enter the market. Therefore, in order to survive and prosper, companies need to apply creative
strategies to access their environmental resources. This premise is supported by the resource dependence theory,
which states that the survival and even the success of an organization depend on its ability to manage its
relationship with the environment (Pfeffer & Salancik, 1978).
Thus, according to Pfeffer:
Organizations require personnel, money, social legitimacy, customers, and a variety of technological and
material inputs in order to continue to function. [...] There are numerous resources which potentially can be the
focus around which power is organized. These include money, prestige, legitimacy, rewards and sanctions, and
expertise, or the ability to deal with uncertainty. (Pfeffer, 1981, p. 101).
There are several ways companies can obtain the external resources they need. According to some economic
sociology theories (e.g. social capital theory (Bourdieu, 2000) and resource dependence theory), social
connection networks, such as board members affiliations, can be an excellent way for firms to access these
resources. Lemieux (2000) maintains that social connection networks can be used to recognise links and
affiliations, circulate information, provide assistance, take action in conflict or cooperation situations, link
economic agents (business connections), and monitor public policies.
Political connections appear to be the most sought-after, and probably the most effective, social connections for
companies. Certainly, current realities reflect increased interaction between politics and business. More
specifically, since politicians primary role as societys representatives is to regulate the sharing of collective
resources, it is advantageous for firms to control political decisions in order to obtain easier access to these
resources. To an increasing extent, politicians financial dependence on businesses is making it easier for
companies to exercise control. Breton and Pesqueux (2006) argue that firms influence society because they affect
its representatives (politicians), particularly through the financing they provide. Companies therefore have
control over regulations and public policy. Furthermore, shareholders, managers and politicians often belong to
the same social class, the same clubs, and the same associations.
3. Business and Government Officers belong to the Same Elite
In our system, corporations have more power than politicians because politicians depend heavily on businesses
for financing. Given the number of actors who switch from business to politics and vice versa, connections
between politics and corporations are unavoidable.
The politicians are financed by enterprises or their owners. Consequently, they are attached by this financing
when they reach a position of power, although relative. However, they do not have to be bought necessarily.
Politicians are from the same social class, schools, social clubs than entrepreneurs and managers. Therefore, they
believe in the same ideas and participate in the same movements or ideologies. Politicians often come from the
entrepreneurial community or are professionals, lawyers, for instance, who had close relationships with the
business community before their election. (Breton & Pesqueux, 2006, p. 19)
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In this respect, former politicians contribute an extremely important type of social capital (Bourdieu, 1986) to
companies when they decide to become directors or executive members, their political connections. This social
capital can give firms access to numerous advantages at different levels of government, especially in relation to
contracts and financing.
For Bourdieu (1980), social capital represents the social effects of a group (family, former elite, school, fraternity,
nobility, etc.) capacity to mobilise capital (cultural and economic). In this sense, capital attracts capital: its
acquisition and sharing can be achieved in a social space where other members of society also have cultural,
economic and social capital.
In society, people who possess and have the ability to mobilise these three kinds of capital are considered as an
elite group and as belonging to the same environment. They may be from a capitalist, economic and financial
elite (corporate managers/owners, bankers), a political elite (politicians), or other (professionals such as
architects, engineers, and so on) (Zald, 1969; Galaskiewicz, 1985; Hill, 1995; Mizruchi, 1996). The members of
these elite groups attended the same universities, belong to the same associations and clubs and have the same
affiliations. Whether they are in politics or business, they meet and communicate with each other at various
activities. Firms appoint people from government or politics; business people move into politics and hold
government functions.
4. From Government to Business and Vice Versa: The Canadian Context
The Parliament of Canada Act contains no provisions about switching from politics to business or vice versa. It
simply stipulates that a person cannot cumulate business and political functions; no restrictions are placed on
moving from business to politics or in the opposite direction.
In the province of Quebec, a person can cross over from business to politics without restriction. However, the
situation differs when it comes to moving from politics to business. Under the Quebec Code of Ethics and
Conduct of the Members of the National Assembly, no Cabinet Minister may, for example, hold the post of
director or officer of a legal person, partnership or association. Moreover, Cabinet Ministers may not, in the two
years after they leave office, accept any appointment to a board of directors or as a member of any body, agency,
enterprise or other entity that is not a State entity.
Both at the federal and the provincial levels, a Member of Parliament, Member of the Provincial Parliament,
Member of the National Assembly or Member of the Legislative Assembly may be a shareholder of a company.
As well, in these jurisdictions, switching from politics to business and vice versa remains relatively easy.
5. Research on Firms Political Connections and Hypotheses
As mentioned above, the numerous studies that have been carried out primarily examined the US context.
However, while most of these focus on the relationship between political connections and firms financial
performance, some merely describe the nature and the extent of firms political activities (Shaffer & Hillman,
2000; Hillman, 2003).
5.1 Political Connections and Firms Financial Performance
The literature by and large demonstrates that firms political connections influence their financial performance.
Claessens, Feijen, and Laeven (2008) indicate that in the period surrounding the 1998 and 2002 elections,
Brazilian firms that contributed to federally elected deputies posted higher stock returns than other firms.
Based on a sample of S&P500 companies, Goldman, Rocholl, and So (2009) showed an abnormal positive stock
return following the appointment of a board member with political connections. They also concluded that
subsequent to the US Republican presidential victory in 2000, companies connected to the Republican Party
increased in value (measured by stock returns), while those connected to the Democratic Party saw their value
decrease.
Using a large sample of non-financial firms from 77 countries, Boubakri, Mansi, and Saffar (2013) investigated
the impact of political institutions on corporate risk taking and found that, from 1988 to 2008, solid political
institutions were positively associated with corporate risk taking. In a subsample of 45 countries, they also found
that politically connected firms engaged in greater risk. They thus suggest that close ties to government lead to
less conservative investment decisions and possibly to higher performance.
Brockman, Rui, and Zou (2013) studied the link between a firms political connections and its merger and
acquisition performance. Using a sample of mergers and acquisitions made by politically connected acquirers
and their matching non-connected peers across 22 countries, they found that political connections played an
economically significant role in post-merger performance. The nature of this effect depended on the institutional
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setting. In countries with strong legal systems or low levels of corruption, politically connected bidders
underperformed unconnected bidders by roughly 15% in terms of abnormal stock returns over a three-year
period. In contrast, politically connected bidders outperformed unconnected bidders by more than 20% in
countries where the legal system is weak or corruption levels high. The authors found more evidence of
differential post-merger performance for domestic mergers than for cross-border mergers.
In the Canadian context, Dicko and Khemakhem (2015) showed that politically connected S&P/TSX firms
performed better financially (measured by return on assets and return on equity) than non-politically connected
firms.
5.2 Political Connections and Access to Financial Resources
Dinc (2005) investigated the influence of politics on government-owned banks in 43 countries (excluding the
United States), finding that, relative to private banks, these banks increased their lending in election years. This
effect was robust when controlling for country-specific macroeconomic and institutional factors, as well as for
bank-specific factors. The increase in lending was equivalent to about 11% of a government-owned banks total
loan portfolio, or about 0.5% of the countrys median GDP per election per government-owned bank.
Working with a sample of Thai firms before the 1997 Asian financial crisis, Charumilind, Kali, and
Wiwattanakantang (2006) examined whether business connections predicted preferential access to long-term
bank credit. They found that firms with connections to banks and politicians had greater access to long-term debt
than firms without such ties. Connected firms needed less collateral, obtained more long-term loans, and
appeared to use fewer short-term loans than those without connections.
Faccio, Masulis, and McConnell (2006) analysed the likelihood of a government bailout of 450 politically
connected firms in 35 countries between 1997 and 2002. They found that politically connected firms were
significantly more likely to be bailed out than similar non-connected firms. In addition, politically connected
firms were disproportionately more likely to be bailed out when the International Monetary Fund or the World
Bank provided financial assistance to the firms home government. Furthermore, among the bailed-out firms,
those with political connections exhibited significantly poorer financial performance than their non-connected
peers at the time of and following the bailout.
Claessens, Feijen, and Laeven (2008) showed that, relative to a control group, Brazilian firms that provided
contributions to federally elected deputies substantially increased their bank financing after each election.
Chen, Shen, and Lin (2014) examined whether political connections improved firms access to financing.
Working with a sample of 69,332 individual bank loan contracts for listed firms in Taiwan from 1991 to 2008,
they found that politically connected firms enjoyed preferential treatment for bank loans, benefited more from
government-owned banks than from privately owned banks, and received more preferential treatment from
government-owned banks during presidential election years.
Based on a hand-collected data set of the political connections of S&P 500 companies between 2003 and 2008,
Houston, Jiang, Lin, and Yuema (2014) found that the cost of bank loans was significantly lower for companies
whose board members had political ties.
5.3 Research Hypotheses
Although numerous studies have examined corporate political activities in the United States, scant research
exists on the relationship between political connections and winning government contracts. One such study by
Agrawal and Knoeber (2001) found that firms that had a higher proportion of sales to government also had more
politically connected directors on their board. The study was based on a sample of 264 manufacturing firms on
the Forbes 800 list in 1987.
Wang (2014) concluded that 22.35% of the total revenue of politically connected firms was generated by
Department of Defence contracts, whereas such contracts accounted for 8.68% of the total revenue of
non-connected firms. This result was based on a sample of 112 public companies out of the top 500 recipients of
US Department of Defence contracts in 2008.
In the Canadian context, reports in the media about possible corruption and collusion in the construction industry
give the impression that politically connected firms receive more government contracts than non-connected firms.
In fact, in November 2011, the Quebec Government created a Commission of Inquiry on the Awarding and
Management of Public Contracts in the Construction Industry (Note 1). The testimonies heard by this
commission showed that the construction industry operates mainly through political connections: politicians
receive money for themselves or their party and in return help companies secure government contracts.
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We thus put forward the following main research hypothesis:
H1: There is a positive relationship between political connections and winning government contracts in the
Canadian context.
This hypothesis leads to two sub-hypotheses:
H1a: Politically connected firms win more government contracts than non-politically connected firms.
H1b: Politically connected firms win higher-value government contracts than non-politically connected
firms.
6. Sample and Data
This study examined approximately 250 S&P/TSX companies. After eliminating financial and insurance
companies, our final list contains some 220 firms. The list of these companies was downloaded from the
Compustat database for the period from 2010to 2014 inclusively. Financial data were also retrieved from the
same source, while data on firms political connections were hand collected from the BoardEx database.
Information about government contracts derives from the Government of Canadas Public Works and
Government Services website, buyandsell.gc.ca/procurement-data.
7. Analysis Model
We used the following model to achieve our research objective:
GC = a + b1PC + b2FS + b3FP + b4Debt + b5I + b6U.S. + ε (1)
Where:
GC = government contracts
a = constant
PC = political connections
FS = firm size
FP = financial performance
Debt = indebtedness
I = industry
US = US listing
ε = error term
In this model, all our variables could be endogenous. For example, some studies have shown that political
connections have an impact on firm financial performance. To deal with this endogeneity problem, we have
decided to perform a two-stage least square analyses. Thus, our second model is the following:
FP = a + b1PC + b2GC + b3FS + b4Debt + b5I + b6U.S. + ε (2)
8. Study Variables
The model contains one dependent variable (government contracts) and one independent variable (political
connections). We have also included several control variables that can potentially influence the firms revenues.
In fact, a government contract secured by a firm constitutes part of it revenues. Financial literature recognises
certain variables, such as firm size, financial capacities (equity and debt) and past financial performance, as
having an influence on a firms revenue.
8.1 Dependent Variable: Government Contracts
In this study, what we consider as government contract is any purchase of goods and services made by the
Canadian federal. This purchase can be made on a long or a short terms. This variable is measured in the
following two ways: first, a dummy variable (winning government contracts) is used to measure whether the
firm received a government contract between 2009 and 2014 (1 if the firm had a government contract and 0
otherwise); a second variable (value of contracts) is used to measure the value of the government contracts
obtained.
8.2 Independent Variable: Political Connections
Even though firms have a number of options for political action (contributions to political action committees,
lobbying, soft money contributions, and advocacy advertising (Hadani, 2007), most studies have used the same
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24
definition of political connections, i.e., a firm is politically connected when at least one of the members of the
board of directors, the executive director or the majority shareholder is currently serving or has served in politics
as a Minister, departmental Cabinet member or Member of Parliament. The dummy variable, political
connections, is assigned the value of 1 if the firm is politically connected and 0 otherwise.
8.3 Control Variables
1). Financial performance. Past studies have shown that three measures of financial performance could be
influenced by political connections: return on assets (ROA), return on equity (ROE) and market-to-book value
(MTB). In this study, these three variables are used to represent financial performance. ROA is the result of
earnings before interest and tax (EBIT) divided by total assets. ROE is EBIT divided by shareholders equity.
2). Firm size. Since the most common measure of firm size is the natural logarithm of the firms total revenue,
we used this value.
3). Industry. This factor is measured by a dummy variable based on the North American Industry Classification
System: 1 for Agriculture, forestry, fishing and hunting; 2 for Mining, quarrying, and oil and gas extraction; 3 for
Utilities; 4 for Construction; 5 for Manufacturing; 6 for Wholesale trade; 7 for Retail trade; 8 for Transportation
and warehousing; 9 for Information and cultural industries; 10 for Finance and insurance; 11 for Real estate and
rental and leasing; 12 for Professional, scientific and technical services; 13 for Management of companies and
enterprises; 14 for Administrative and support, waste management and remediation services; 15 for Educational
services; 16 for Health care and social assistance; 17 for Arts, entertainment and recreation; 18 for
Accommodation and food services; and 19 for Other services.
4). Indebtedness. Capital structure is an extremely important factor that can influence corporate operations. In
this study, this variable is measured by the ratio of long-term debt to shareholders equity.
5). US listing. Owing to Canadas close business ties with the United States, many Canadian companies are also
listed on US financial markets. Since certain regulations in the US (e.g. on corporate governance) are more
stringent than in Canada, Canadian companies behave differently when listed on US financial markets
(Khemakhem & Dicko, 2013; Dicko & Khemakhem, 2015). We therefore decided to include this variable in our
study, using a dummy variable valued at 1 if the company is listed on US markets and 0 otherwise.
9. Descriptive Statistics and ANOVA Results
Table 1 presents information about all the S&P/TSX firms analysed in this study, including financial and
insurance companies, showing that this industry accounts for 11.6%. After eliminating financial and insurance
companies, the final list of firms examined is mainly comprised of companies from Mining, quarrying, and oil
and gas extraction (85), followed by firms from Manufacturing (37); Real estate and rental (21); Information and
cultural industries (16); Utilities (12); Retail trade (12); Transportation and warehousing (11); Wholesale trade
(7); Construction (6); Professional, scientific and technical services (6); Administrative and support (3); Arts,
entertainment and recreation (2); Accommodation and food services (2); and Healthcare and social assistance
industries (1). The list does not include any companies from Agriculture, fishing and hunting. It is important to
note that the industry classification of certain companies is not that evident. For instance, some companies that
specialise in construction and engineering, such as SNC-Lavalin, are classified in professional, scientific and
technical services rather than construction.
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Table 1. Sample statistics by industry
Industry
Number of
firms
Frequency over an
average of five years
Percentage
Cumulative
percentage
2
Mining, quarrying, and oil and gas extraction
85
427
34.4
34.4
3
Utilities
12
60
4.8
39.2
4
Construction
6
29
2.3
41.5
5
Manufacturing
37
183
14.7
56.2
6
Wholesale trade
7
36
2.9
59.1
7
Retail trade
12
59
4.7
63.9
8
Transportation and warehousing
11
55
4.4
68.3
9
Information and cultural industries
16
78
6.3
74.6
10
Finance and insurance
29
144
11.6
86.2
11
Real estate and rental and leasing
21
104
8.4
94.5
12
Professional, scientific and technical services
6
29
2.3
96.9
14
Administrative and support, waste management
and remediation services
3
15
1.2
98.1
16
Health care and social assistance
1
5
0.4
98.5
17
Arts, entertainment and recreation
2
10
0.8
99.3
18
Accommodation and food services
2
9
0.7
100.0
250
1,243
100.0
Table 2 presents descriptive statistics (number of observations, mean, standard deviation, minimum and
maximum) according to political connections, showing that the mean of firm size is higher for politically
connected firms than for non-connected firms (7.52 vs 6.63).
Table 2. Descriptive statistics according to political connections
Mean of the variable
St. deviation
Minimum
Maximum
Firm size
Firm is not politically connected
6.635880
1.4503672
-0.9138
10.6355
Firm is politically connected
7.520136
1.6018933
0.8953
10.6901
Total
7.073459
1.5893033
-0.9138
10.6901
ROA
Firm is not politically connected
0.058383
0.0985232
-1.0895
0.5196
Firm is politically connected
0.066070
0.0673285
-0.4613
0.3602
Total
0.062139
0.0847783
-1.0895
0.5196
ROE
Firm is not politically connected
0.132165
0.1717760
-0.8338
0.8353
Firm is politically connected
0.182449
1.2990083
-20.2963
18.9524
Total
0.156733
0.9161709
-20.2963
18.9524
Market-to-book
value
Firm is not politically connected
2.183107
2.3873649
-6.5711
24.2861
Firm is politically connected
1.978237
12.0803299
-229.0280
148.4757
Total
2.083011
8.6113772
-229.0280
148.4757
Indebtedness
Firm is not politically connected
0.548579
0.7030918
-1.7279
7.3859
Firm is politically connected
0.833888
11.3932389
-180.9904
181.5952
Total
0.687977
7.9770554
-180.9904
181.5952
US listing
Firm is not politically connected
0.94
0.245
0
1
Firm is politically connected
1.00
0.000
1
1
Total
0.97
0.167
0
1
Industry
Firm is not politically connected
4.63
3.550
2
18
Firm is politically connected
6.24
3.890
2
17
Total
5.41
3.804
2
18
Winning
government
contracts
Firm is not politically connected
0.08
0.277
0
1
Firm is politically connected
0.14
0.351
0
1
Total
0.11
0.317
0
1
Value of contracts
Firm is not politically connected
1796126.45
16511554.36
0.0000
2.4680E+8
Firm is politically connected
6984672.01
64758659.63
0.0000
1.1099E+9
Total
4326663.69
46793659.01
0.0000
1.1099E+9
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We note the same pattern for ROA (0.066 vs 0.058), ROE (0.182 vs 0.132), indebtedness (0.833 vs 0.548) and
value of contracts (6984672 vs 1796126). In other words, the mean value of contracts of politically connected
firms is higher than the mean value of contracts of non-connected firms. Politically connected firms are larger
than non-connected firms, and have a higher ROA and ROE. However, they are more indebted than their
non-connected counterparts.
Conversely, the mean of market-to-book value of non-politically connected firms is higher than that of politically
connected firms (2.183. 1.978). In addition, more politically connected firms are listed on US market than
non-connected firms (96 vs 79).
Table 3. Descriptive statistics according to political connections and winning government contracts
Political connections
Total
Firm is not politically
connected
Firm is politically
connected
Winning
government
contracts
Firm has not won
government contracts
Number
516
459
975
% in Winning government contracts
52.9%
47.1%
100.0%
% in Political connections
91.7%
85.6%
88.7%
% du total
47.0%
41.8%
88.7%
Firm has won
government contracts
Number
47
77
124
% in Winning government contracts
37.9%
62.1%
100.0%
% in Political connections
8.3%
14.4%
11.3%
% du total
4.3%
7.0%
11.3%
Total
Number
563
536
1,099
% in Winning government contracts
51.2%
48.8%
100.0%
% in Political connections
100.0%
100.0%
100.0%
% du total
51.2%
48.8%
100.0%
According to Table 3, 48.8% of S&P/TSX companies are politically connected, in comparison to51.2% that are
not. Also, only 11.3% of all companies received government contracts, versus 88.7% that did not. Of those
companies that received government contracts, 7% are politically connected and 4.3% are not. Some 14.4% of
politically connected firms received government contracts, compared to 85.6% did not, while8.3% of
non-politically connected firms received government contracts, in contrast to 91.7% that did not. Thus, the
number of politically connected firms that won government contracts is greater than the number of
non-politically connected firms that won such contracts (77 vs 47). These results are confirmed by descriptive
statistics in Table 2 that show politically connected firms as having a higher mean value of contracts than the
mean value of contracts of non-connected firms. These statistics confirm our sub-hypotheses (H1a and H1b).
These descriptive statistics are similar to the findings of Agrawal and Knoeber (2001) and Wang (2014) in the
US context. In fact, Agrawal and Knoeber (2001) concluded that politically connected firms had a higher
proportion of sales to government than non-connected firms. According to Wang (2014), politically connected
firms generated 22.35% of their total revenue from Department of Defence contracts, in contrast to
non-connected firms that generated only 8.68% of their revenue from such contracts.
Table 4. Results of ANOVA Factor: Political connections
Sum of square
ddl
Mean square
F
P value
Firm size
Inter-groups
208.943
1
208.943
89.582
0.000
Intragroup
2488.702
1067
2.332
Total
2697.645
1068
ROA
Inter-groups
0.016
1
0.016
2.252
0.134
Intragroup
7.847
1093
0.007
Total
7.863
1094
ROE
Inter-groups
0.692
1
0.692
0.824
0.364
Intragroup
917.578
1093
0.840
Total
918.270
1094
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27
Market-to-book value
Inter-groups
11.484
1
11.484
0.155
0.694
Intragroup
81114.980
1093
74.213
Total
81126.464
1094
Indebtedness
Inter-groups
22.272
1
22.272
0.350
0.554
Intragroup
69592.681
1093
63.671
Total
69614.953
1094
US listing
Inter-groups
0.174
1
0.174
6.412
0.012
Intragroup
4.684
173
0.027
Total
4.857
174
Industry
Inter-groups
705.352
1
705.352
50.976
0.000
Intragroup
15179.272
1097
13.837
Total
15884.624
1098
Winning government
contracts
Inter-groups
0.994
1
0.994
10.005
0.002
Intragroup
109.015
1097
0.099
Total
110.009
1098
Value of contracts
Inter-groups
7392081753041844.000
1
7392081753041844.000
3.383
0.066
Intragroup
2396839801172452400.000
1097
2184904103165407.800
Total
2404231882925494300,000
1098
Table 4 shows a very significant difference between politically connected and non-connected firms in terms of
firm size (p value = 0.000), US listing (p value = 0.012), industry (p value = 0.000) and winning government
contracts (p value = 0.002), and a slightly significant difference in the value of these contracts (p value =
0.066).However, no significant difference was noted between politically connected and non-connected firms in
terms of ROA (p value = 0.134), ROE (p value = 0.364), market-to-book value (p value = 0.694) or indebtedness
(p value = 0.554).
10. Correlation Analyses and Endogeneity Test Results
In our model (equation 1), all independent variables could be correlated between themselves or correlated with
error term and create problems of collinearity and endogeneity. For example, government contracts could
influence financial performance and firm size and indebtedness, as could, according to several studies (Dicko &
Khemakhem, 2015), political connections. For this reason and to determine the extent of collinearity and
endogeneity problems, we decided to perform tests using correlation analyses. These analyses identify the
variables that are correlated between themselves, particularly independent variables. A correlation coefficient of
50% or more is generally considered a critical level that could lead to collinearity problems.
Table 5. Results of Pearson correlation analysis
1
2
3
4
5
6
7
8
9
10
1
Firm size
1
2
ROA
0.219**
1
3
ROE
0.099**
0.137**
1
4
Market-to-book value
0.023
0.045
0.893**
1
5
Indebtedness
0.062*
0.002
0.963**
0.935**
1
6
US listing
-0.001
0.007
0.010
0.023
0.000
1
7
Industry
0.127**
0.138**
0.035
-0.036
0.000
-0.,311**
1
8
Political connections
0.278**
0.045
0.027
-0.012
0.018
0.189*
0.211**
1
9
Winning government
contracts
0.270**
0.128**
0.107**
0.083**
0.080**
0.051
0.230**
0.095**
1
10
Value of contracts
0.107**
0.025
0.017
0.018
0.009
0.031
0.113**
0.055
0.259**
1
** Correlation is significant at p=0.01 (two-tailed).
* Correlation is significant at p=0.05 (two-tailed).
Table 5 shows a positive and very significant correlation between political connections and winning government
contracts (0.095**). In addition, winning government contracts is very significantly correlated to firm size
(0.270**), ROA (0.128**), ROE (0.107**), market-to-book value (0.083**), indebtedness (0.080**), and
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28
industry (0.230**).
Of the independent and control variables, political connections are positively and very significantly correlated to
firm size (0.278**) and to industry (0.211**). Industry is significantly correlated to firm size (0.127**) and ROA
(0.138**). Firm size is significantly correlated to ROA (0.219**), to ROE (0.099**), to indebtedness (0.062*),
and to value of contracts (0.107**). ROA is also significantly correlated to ROE (0.137**), while industry is
significantly correlated to value of contracts (0.113**). However, these coefficients of correlation are not critical
enough to create collinearity problem since they are below 50%.
The most critical correlations are between ROE and market-to-book value (0.893**), ROE and indebtedness
(0.963**), and indebtedness and market-to-book value (0.935**).
11. Results of 2SLS Analyses
To deal with collinearity and potential endogeneity problems, we decided to use a two-stage least-squares model
of analysis. Two set of analyses were performed: one with the dummy variable, winning government contracts,
and the other with the value of contracts as dependent variable.
11.1 Results of 2SLS Analyses with Winning Government Contracts as Dependent Variable
Results of 2SLS analyses in Table 6 show that political connections are positively and significantly associated
with winning government contracts (p value = 0.034), confirming Hypothesis 1. A similar result is obtained for
firm size (p value = 0.001) and ROE (p value = 0.000). Indebtedness (p value = 0.005) and ROA (p value =
0.003) are negatively and very significantly associated with winning government contracts, whereas no
significant association is noted in terms of US financial market listing (p value = 0.945), industry (p value =
0.848), or market-to-book value (p value = 0.229). The model is very significant (model p value = 0.000), with
an adjusted R2 of 27%.
Table 6. Results of 2SLS Dependent variable: Winning government contracts
Non-standardized coefficients
Beta
t
P value
B
Standard error
(Constant)
-0.175
0.146
-1.197
0.233
Political connections
0.094
0.044
0.172
2.138
0.034
US listing
-0.008
0.121
-0.005
-0.070
0.945
Industry
-0.001
0.006
-0.016
-0.192
0.848
Indebtedness
-0.055
0.019
-2.769
-2.832
0.005
Firm size
0.037
0.010
0.242
3.522
0.001
ROA
-1.152
0.376
-0.346
-3.066
0.003
ROE
0.681
0.161
3.626
4.239
0.000
Market-to-book value
-0.014
0.012
-0.598
-1.207
0.229
R2
0.305
Adjusted R2
0.271
F
8.985
Equation P value
0.000
11.2 Results of 2SLS Analyses with Value of Contracts as Dependent Variable
Table 7shows that political connections do not significantly influence the value of contracts awarded to
companies (p value = 0.189). Of the control variables, firm size (p value = 0.038) and ROE (p value = 0.000)
positively and significantly influence the value of contracts awarded, while this influence is negative for ROA (p
value = 0.000). Market-to-book value (p value = 0.791), US listing (p value = 0.354) and industry (p value =
0.393) have no significant influence on the value of contracts. The model is very significant (model p value =
0.000), with an adjusted R2 of 33.6%.
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29
Table 7. Results of 2SLS dependent variable: Value of contracts
Non-standardized coefficients
Beta
t
P value
B
Standard error
(Constant)
383368.071
1148086.365
0.334
0.739
Political connections
458052.635
347364.327
0.101
1.319
0.189
Firm size
172133.211
82493.628
0.137
2.087
0.038
ROA
-19034227.466
2957285.257
-0.693
-6.436
0.000
ROE
9844064.247
1264507.832
6.354
7.785
0.000
Market-To-Book value
24801.880
93590.473
0.125
0.265
0.791
Indebtedness
-1010821.688
151715.754
-6.217
-6.663
0.000
US listing
-887569.647
954417.607
-0.066
-0.930
0.354
Industry
-43501.951
50802.627
-0.067
-0.856
0.393
R2
0.367
Adjusted R2
0.336
F
11.885
Equation P value
0.000
12. Conclusion and Discussion
Overall, our statistical results confirm our hypotheses respecting winning government contracts. Hypothesis 1
proposed a positive relationship between political connections and winning government contracts among
Canadian firms. Political connections positively and significantly influence the receipt of government contracts.
According to Hypothesis 1a, politically connected firms win more government contracts than non-politically
connected firms. Hypothesis 1b posited that politically connected firms win higher value government contracts
than non-politically connected firms. A significant difference was noted between politically connected and
non-connected firms in terms of winning government contracts and contract values. In addition, firms with
political connections were awarded higher value contracts. However, the two-stage least-squares analyses show
that political connections do not significantly influence the value of contracts awarded. In this respect, political
connections have more influence on the securing of government contracts than on the value of contracts.
Our study is the first to demonstrate a direct relationship between firms political connections and government
contracts in the Canadian context. The results confirm the trend towards a strong interdependence between
politics and business, particularly the increase in corporate actions intended to influence government decisions.
These results confirm the theories put forward by numerous authors (Bierman, 1999; Hillman & Hitt, 1999;
Hillman, Zardkhoohi, & Bierman, 1999; Lord, 2000; Shaffer & Hillman, 2000; Wawro, 2001; Schuler, Schnietz,
& Baggett, 2002; Hillman, 2003; 2005) who argue that firms political actions serve as a means to bring them to
closer to politics and government institutions and to exercise control. These authors also maintain that such
political actions could be part of non-market strategies that enable firms to access resources they need.
The results of this study also provide empirical support to social theories that view companies (and their
activities) as part of a greater social structure. Within this social structure, companies and government interact
through their social relationships. Our results show that these social relationships are totally integrated in
economic transactions. As noted in the results section, 48% of S&P/TSX firms are politically connected. But this
is only one type of connection. Dicko (2011) has shown that companies have three types of connections:
economic (relationships between companies), political (relationships between companies, politics and
government organisations), and social (relationships between companies and other organisations such as
not-for-profit organisations, associations, clubs, and professional affiliations). Extensive literature on board
interlocking has also shown that firms board interlocks (i.e. economic connections) are widespread (Burris,
2005). Finally, it should be noted that all these companies connections are often among the same elite groups
(Burris, 2005).
From an ethical point of view, it is important for society to be aware of how the government spends public funds
and to understand the motivations behind its investment decisions. These results are also supported by social
capital and resource dependence theories: firms can use social connections to access external resources by
influencing government policies. Our results support Agrawal and Knoeber (2001) in their study of the US
context and confirm that political connections can help firms gain access to multiple resources, such as
commercial contracts.
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30
13. Practical Implications
The study findings have implications on at least three levels: managerial, regulatory and governmental
organisations. Firms can consider political connections to be a non-market, long-term strategy to help them gain
competitive advantages and improve performance (Hadani, 2007). They can strategically appoint directors and
managers according to the advantages their political connections can bring (Maman, 2000). However, they must
carefully consider the cost-benefit ratio of this strategy. Although political connections can have a positive
impact, they could also involve negative costs. These costs could be ethical in that firms could find themselves in
a position of conflict of interest that would spark extensive media exposure. For example, in Quebec, the
Charbonneau Commission revealed numerous instances of corruption and collusion in the process for awarding
contracts in the construction industry due to the relationships between some construction firms and politicians.
These results alert regulatory and governmental organisations to the need for them to remain vigilant and
strengthen corporate governance regulations to prevent the excesses and abuses that could arise from firms
political actions.
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... Among these tactics is developing linkages with politicians by engaging politicians on the board because companies believe that political connections (POCON) enhance a company's financial performance (FP). Interestingly, past studies have found that the impact of POCON on company FP was both positive and negative (Sokolov & Solanko, 2016;Dicko, 2016, Wang et al., 2018. For example, empirical evidence has confirmed that POCON positively impacts a company's FP (e.g., Ding et al.., 2014;Unsal, 2017;Wang et al., 2018;Maaloul 866 et al., 2018).. ...
... Politically connected companies have been found to enjoy substantial economic benefits due to systematic exchanges of favours between the companies and politicians (Chaney et al., 2011), a greater likelihood of being bailed out in times of economic distress (Faccio, Masulis, & McConnell, 2006), more favourable bank lending (Khwaja & Mian, 2005) and have better competitive positions and greater market power (Faccio, 2006). Conversely, some empirical evidence has found the POCON had a negative impact on company FP and reduced company efficiency (Faccio, 2010;Bliss & Gul, 2012;Dicko, 2016;Berkman & Galpoththage, 2017;Habib et al., 2017). Additionally, some researchers also found that the quality of the accounting information provided by politically connected companies was significantly lower than that of their non-connected peers (Chaney et al., 2011). ...
... For instance, some research believes that political connectedness will positively impact company financial performance (e.g., Boubakri, Cosset & Saffar, 2012;Lashitew, 2014;Maaloul et al., 2018). Some researchers (e.g., Dicko, 2016;Wang et al., 2018) found that politically connected companies have advantages over non-politically connected companies in a stable environment. In this instance, engaging politicians will bring positive changes, and, in turn, these positive changes will enhance the financial performance of a firm. ...
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Prior theoretical and empirical studies have suggested that political influence affects the application of corporate governance and firm performance enormously. However, several fundamental questions remain to be answered. To fill this knowledge gap,the study's main objectives are examining the direct impact of political connection on firm financial performance in Pakistani non-financial listed companies and the moderating effect of director's financial expertise on political connections and firm financial performance. The study utilised panel data of 220 firms from 2008 to 2017 and used panel corrected standard error regression analysis. The results show that political connection negatively impacted firm financial performance, and director financial expertise as a moderator strengthened the relationship between political connections and firm financial performance. This study's results supported political economy theory in that weak judicial systems and unstable political systems have immense effects on investor’s rights. The study contributes to extending the existing literature on political connection by providing evidence of the impact of politically connected firms on firm performance in an emerging market. The study also deliberates on how the director’s financial expertise contributes towards the relationship. The findings could be generalised to other countries with similar degrees of development and culture.
... In the U.S., a number of studies have investigated the impact of such activities on access to specific resources (public contracts and loans) and firm financial performance (Goldman et al., 2013;Chen et al., 2015). In Canada, several studies have shown that listed companies hold the lion's share (more than 50%) of political connections and that such connections benefit firms in terms of performance and access to some resources, including public contracts (Dicko 2016). ...
... Most prior literature focused on the impact of firms' political connections on their financial performance and access to resources, such as loans and contracts. This research was carried out not only in the U.S. (Goldman et al., 2009), but also in Canada (Dicko and El Ibrami, 2013;Dicko and Khemakhem, 2015) as well as elsewhere in the world (Claessens et al., 2008 In the Canadian context, Dicko (2016) demonstrated that politically connected Canadian firms listed on the S&P/TSX composite index are awarded more numerous and lucrative federal government contracts than non-politically connected firms are. Similar results were obtained by Goldman et al. (2013) and Wang (2014) in the U.S. Dicko and Khemakhem (2015) also show that the political connections of S&P/TSX Canadian firms are positively and significantly related to their return on assets. ...
... Table 8 shows that politically connected firms have higher equity, long-term debt, market value, revenues, ROA, ROE, and EPS. These observations trend in the direction of previous studies that demonstrated that politically connected firms are wealthier and exhibit better financial indicators (Dicko, 2016;2020). This first statistical result seems to confirm our first hypothesis. ...
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Corporate political activities can bring genuine political capital to firms and are an effective way to access key resources to boost financial capital and maximize profits. These activities fall into three categories: coopting ex-politicians to decision-making bodies (board of directors and top management) to benefit from their social capital; lobbying to directly influence public policy; and making financial contributions to the activities of political parties and committees. This study asks the following question: what is the combined effect of two of these activities (political connections and lobbying) on the financial and accounting indicators of Canadian listed companies? We argue that engaging in corporate political activities allows firms to accumulate a type of political capital that we define as the sum of all political activities conducted by an individual company. To perform our research, we analyzed Canadian companies listed on the S&P/TSX composite index from 2012 through 2016. Results show that firms with this type of political capital are generally in a better financial position than those without it. A significant correlation was found between a firm’s political capital and its main sources of financing (equity and long-term debt) as well as with its ROE. Political capital has more positive impacts on key firm financial indicators than does each type of political activity on its own (synergistic effect).
... Further, politicians and business leaders are members of a common elite class, attend the same universities, belong to the same associations and clubs, and have common affiliations. Whether in politics or business, these individuals meet and communicate with each other through various activities, with the result that firms appoint people from government or politics, and businesspeople move into politics and hold government functions (Dicko, 2016b). ...
... The literature indicates that politically connected firms, more than non-connected companies, obtain more government contracts (Wang, 2014;Dicko, 2016b) and greater access to financial resources (Charumilind et al., 2006). ...
... In the Canadian context, Dicko and El Ibrami (2013) noted, after investigating a random sample of publicly listed companies, that political connections (and other types of connections, such as economic and social) positively influence long-term debt. Further, based on companies listed on the S&P/TSX Composite Index during the 2010 to 2014 period inclusive, Dicko (2016b) found that political connections were positively and significantly associated with winning government contracts. These firms obtained more government contracts and higher value contracts than those with no such connections. ...
... Companies increasingly use lobbyists to influence policy makers and thus change public policy directly at the source. However, firms can influence politics through other means (Dicko 2016a), with the result that every type of business activity could have a political implication. For this reason, it is important to thoroughly investigate and better understand the actual consequences of business-political links, both for society and the companies involved. ...
... These benefits include easier access to financing and new contracts (including public contracts) and an increase in financial performance (Dinc 2005;Faccio et al. 2006;Claessens et al. 2008;Chen et al. 2014;Houston et al. 2014). However, most of the studies were conducted in the United States using American data, and only few have investigated other contexts, such as Canada (Dicko 2016a). ...
... As just mentioned, voluntary disclosure is one of the most important top management decisions controlled by the board of directors. Although some studies show links between specific aspects of corporate governance, including shareholder rights, and the political connections of Canadian listed companies (Dicko 2016a(Dicko , 2017, very few investigated the direct relationship between political connections and voluntary disclosure (Hung et al. 2018). ...
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Business and politics are now more connected than ever. In Canada, more than 50% of listed companies have political connections through the board of directors or top management. These ties can give companies the resources they need to achieve their goals and possibly even confer a substantial advantage that results in better financial performance. To this end, political connections must influence the various choices and behaviours of politically connected companies, such as their voluntary disclosure strategy. As this type of influence has rarely been investigated in the literature, the current study looks at the impact of board and top management political connections on the voluntary disclosure behaviour of Canadian firms. Four types of voluntary disclosure—environmental, social, governance and total—are analyzed. Results show that politically connected companies make broader voluntary disclosures than non-connected firms do. Board and top management political connections are positively and significantly related to total voluntary disclosure, and board political connections are positively and significantly related to governance disclosures. In addition, top management political connections are positively and significantly related to voluntary environmental and social disclosures. This study is the first to shed light on the link between political connections and the voluntary disclosure of Canadian listed companies, as well as the first to confirm that not all political connections are equal. The impact of these connections on companies’ choices and behaviours can differs according to the politically connected actor’s position in the company, including on the board of directors or in top management. This difference could be explained by the fact that while board are generally concerned about strategic issues, top management deal with operational aspects. Consequently, they may not have the same behaviours and choices.
... However, several studies have been conducted on the impact of political connections on companies in other industries, and the authors have agreed that such connections can be beneficial for those with the connections (Faccio, 2006). Companies with political connections experience more and easier access to funding, a better chance of winning government contracts (Dicko, 2016) and improved financial performance. ...
... ijef.ccsenet.org International Journal of Economics and Finance Vol. 8, No. 11;2016 In Canada, Dicko, and Breton (2013a) and Dicko and Khemakhem (2015) showed that politically connected Canadian companies performed better financially than non-politically connected companies. Their performance was measured using return on assets and return on equity ratios. ...
... International Journal of Economics and Finance Vol. 8, No. 11;2016 institutions. ...
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p style="margin: 0cm 0cm 0pt; text-align: justify; line-height: 150%;">This article’s main goal is to analyze the impact of political connections on the financial performance of Canadian financial institutions. Data on Canadian financial institutions from the S&P/TSX Composite Index over a five-year period was analyzed, and the results demonstrate that contrary to previous studies on companies in other industries, political connections had a negative influence on solvency, return on assets and return on equity for these Canadian financial institutions. Only the market-to-book ratio was positively and significantly influenced by political connections.</p
... Indeed, governance practice is the business characteristic that market watchdogs scrutinize the most. Although good governance practices have been shown to create value and bolster financial performance (Matoussi and Jardak, 2012), there is widespread agreement that politically connected firms already create more value than their counterparts because they are more likely to receive a host of benefits, including contracts, loans and more relaxed oversight in relation to their implementation of regulatory requirements (Claessens et al., 2008;Houston et al., 2014;Dicko, 2016b). It follows that politically connected firms may not need to adopt good governance practices to create value. ...
... These studies, conducted mainly in the USA and in Asia, and some in Canada, have demonstrated that companies with connections have better market (Goldman et al., 2009) and accounting performance (Dicko and Khemakhem, 2015) than unconnected firms. Politically connected firms are shown to obtain more government contracts than other firms, both in the USA (Wang, 2014) and in Canada (Dicko, 2016b). ...
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Purpose The purpose of this paper is to ask the following question: is there a link between being politically connected, the quality of governance and the company’s ownership structure? Design/methodology/approach The author then examined Canadian companies from the S&P/TSX index for the year 2015. Findings Political connectedness is significantly associated with lower quality of governance in relation to shareholders’ rights; ownership concentration is associated with lower quality of governance in relation to the overall governance, board of directors, shareholders’ rights and compensation structure indices; ownership structure does not mediate the relationship between political connections and quality of governance; and number of political connections through the executive is associated with less risky governance practices in relation to compensation structure; in other words, when members of the executive are politically connected, the firm adopts better compensation practices. Research limitations/implications The time limitation is the main weakness of this study and probably the cause of observed mitigated results. Practical implications The author hope that the results will inform regulators on the need not only to further regulate the business-politics relationship, but also to consider the specific traits of concentrated ownership companies and the most critical aspects of corporate governance in politically connected firms, such as shareholders’ rights, particularly those of minority shareholders. For example, an intriguing case to investigate in the Canadian context would be Pierre Karl Péladeau’s foray into Quebec politics and the controversy ignited by his political bid in light of his position as majority shareholder (75 percent) in communications giant Quebecor Inc. Social implications In fact, the results shown that concentrated ownership firms have lower governance quality than non-concentrated ones. Furthermore, in a concentrated ownership context, the minority shareholders’ rights could be threatened. In this sense, the results also shown that shareholders’ rights seem to be the most critical governance issue for the politically connected Canadian firms. These results are therefore the indication that Canadian financial market regulators must take action about politically connected and concentrated ownership firms in order to further protect minority shareholders’ rights. Originality/value This study makes a double theoretical contribution by enriching the literature on corporate governance and by providing one of the first investigations into the direct and comprehensive relationships between political connections, governance and ownership structure.
... This control variable is the size of the company (SIZE) that has a p-value of 0.060. These results are similar to studies conducted by Dicko [43] and Blom [44]. On the other hand, the firm's return on assets (ROA) control variable has a p-value 0.105, and the leverage (LEV) control variable has a p-value of 0.277. ...
Article
Purpose This paper aims to examine the effects of political connections (PCs) on corporate financial performance (CFP) in an emerging economy. It also investigates the moderating influence of the directors’ financial expertise (DFE) on the relationship between politically connected firms and their financial performance. Design/methodology/approach The study sample includes 304 firm-year observations from non-financial Tunisian listed firms covered over 2012–2019. Financial data are from various sources: financial statements, annual reports, official bulletins of the Tunisian Stock Exchange (TSE) and the Financial Market Council. PCs and DFE data are manually collected from the TSE and companies’ websites. Multivariate regression analyses are used to test the research hypotheses. Findings The results show that PCs negatively affect CFP and the DFE is a moderator variable that exacerbates this negative relationship. These results could be explained on the one hand by the fact that politicians often lack management, professionalism and know-how. On the other hand, political members on boards focus mainly on their political agendas and prioritize their interests rather than firm performance. Furthermore, board directors are more inclined towards the grabbing-hand approach to create personal linkages with these politicians and take personal benefits rather than protect the interests of minority shareholders and effectively use firm resources. Research limitations/implications The most important limitation of the study is the small number of non-financial TSE-listed firms. Indeed, the small sample size prevents us from considering industry specificities and working in a homogeneous environment. Practical implications This study recommends that external investors pay particular attention to politically connected firms as PCs tend to weaken corporate governance. Also, it helps policymakers better assess the need to harmonize and develop corporate governance standards and practices that account for the specific conditions in Tunisia to mitigate the lobbying of political parties and supervise their abuse of power. Furthermore, the negative relationship between PCs and CFP in a poorly regulated and governed country could be used by financial institutions in their credit scoring. Social implications The findings suggest that the nexus between politics and business draws attention to corruption post-revolution. Originality/value The originality and the relevance of this study consist in studying the moderating effect of the DFE on the association between PCs and CFP. To the best of the author’s knowledge, this study pioneers assessing the role of the DFE as a moderating variable. It also supplements prior literature by examining the combined factors, such as PCs and DFE, on CFP in an emerging market.
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Corporate governance best practices, especially when not mandated, usually mitigate risk and provide value added (Agrawal & Knober, 1996). Many authors have demonstrated a link between corporate governance and institutional and regulatory environments (Claessens & Yurtoglu, 2012; LaPorta, Lopez-de-Silanes, Shleifer & Vishny 1998; Liu, 2006; Matoussi & Jardak, 2012) and even political power (Claessens & Yurtoglu, 2012). Political connections are known to result in numerous privileges for firms, such as decreased regulatory oversight (Faccio, 2006) and improved financial performance. This paper investigates compliance with governance regulations and political connections as separate topics, as other studies have done, but also looks at their combined effect by analyzing data on the financial performance of S&P/TSX companies. Our results show that regulatory compliance alone does not significantly impact on financial performance, political connections alone have a positive and very significant effect, and both factors combined have a more positive and significant impact than they have individually. We conclude that the analysis confirms our research hypotheses.
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Further to the various scandals that shook North-American markets in the early 2000s, Canada reacted in 2004 and 2005 by changing its regulations on the governance practices of listed companies. Faccio (2006) and otherauthors have argued that politically connected companies can have less regulatory oversight than unconnected firms. This affirmation raises an issue that this article attempts to solve, i.e., whether politically connected Canadian companies are less compliant with regulatory requirements on governance than unconnected firms, and with board of directors requirements in particular. Although politically connected and unconnected firmsdiffer significantly in their compliance with regulation, the analyses show that the state of being politically connected tends to have little bearing on regulatory compliance.
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Despite fast-growing interest in research on political connections, most papers on this topic belong to the economics or public administration fields. Few studies, if any, look into the role of firms' political connections in the Department of Defense (DoD) acquisition area. This paper attempts to bridge this gap by investigating the impact of political connections on the excessive profitability of DoD contractors. We find that, in contrast to what the "corruption hypothesis" predicts, the excessive profits are less (more) pronounced for those contractors with politically connected (non-connected) boards. Our findings suggest that those politically connected board directors may use their experience to serve a benevolent role to the public in keeping DoD contractors from opportunistic profitseeking behaviors that could reach or even cross the federal government's regulatory redline.
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In this article we examine two general approaches to political action (transactional and relational), two levels of participation (individual and collective), and three types of generic political strategies (information, financial incentive, and constituency building), thus presenting a comprehensive taxonomy of political strategies. In addition, we identify firm and institutional variables that affect the likelihood of making specific decisions within the formulation model. The result is a decision-tree model of political strategy formulation that integrates and extends prior diffused work.
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We investigate the association between a firm’s political connections and its merger and acquisition (M&A) performance. Using a sample of M&A deals made by politically connected acquirers and their matched non-connected peers across 22 countries, we find that political connections play an economically significant role in post-merger performance. The nature of this effect depends on the institutional setting. In countries with strong legal systems or low levels of corruption, politically connected bidders underperform unconnected bidders by roughly 15% in terms of abnormal stock returns over a 3-year period. In contrast, politically connected bidders outperform unconnected bidders by more than 20% in countries with weak legal systems or high levels of corruption. We find more evidence of differential post-merger performance for domestic mergers than for cross-border mergers. Overall, our findings show that political connectedness has a significant influence on M&A activities, and the nature of this influence depends crucially on the institutional environment.