Political Connection and Firm’s Performance Among Malaysian Firms

Abstract

The purpose of this study is to examine the influence of political connections on firms’ performance by controlling the effect of board attributes and firms’ characteristics. Specifically, it is argued that politically connected firms enjoy a lot of benefits from the government and said to provide greater chances for the firms to increase their wealth. By using 156 public listed firms between the study period of 2012 to 2017, this study maps out political connection based on the 13th Malaysian general election. The results reveal that the appearance of political connections on board gives significant and negative effect on Tobin Q, while significant and positive effect on Return on Asset (ROA) and Return on Equity (ROE). Board independence is also significant to firms’ performance. This result implies that political connection is a favour for a better firm’s performance and not to firm’s value. The findings have an important implication to investors as it suggests that firms with political connection on board perform better.

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

“…Politically connected officials’ resignation has also been shown to be detrimental to firms’ performance (Aldhamari et al , 2020; Chen et al , 2020; Chong et al , 2018; Proença et al , 2020; Ren et al , 2020), which further highlights the positive impact of having PCs. On the other hand, other studies have documented that PCs harm firms’ performance (Azmi et al , 2020; Ha and Frömmel, 2020; Wu et al , 2012). These results highlight PCs’ inconclusive nature, whether they are beneficial or harmful toward firms’ performance.…”

“…Nevertheless, there are three theories which every so often used to justify such association: resource dependence theory (Pfeffer and Salancik, 2003; Salancik, 1979), agency theory (Jensen and Meckling, 1976) and social exchange theory (Cook and Emerson, 1978; Homans, 1961). Resource dependence theory is used in Azmi et al (2020) and Ren et al (2020); Agency theory is used in Xu et al ’s (2016) paper. Social exchange theory is applied in Liu et al (2018).…”

“…Previous studies have connected PCs with firms’ performance proxied by Tobin’s Q as seen in Niessen and Ruenzi (2010), Deng et al (2012), Wu et al (2012), Yang et al (2012), Muttakin et al (2015), Pérez et al (2015), Xu et al (2016), Chen et al (2017), Aldhamari et al (2020), Azmi et al (2020), Chen et al (2020), Harymawan et al (2019), Hu et al (2019), Ha and Frömmel (2020), Idris et al (2020), Joni et al (2020) and Ren et al (2020). Previous studies also use AR/CAR to measure firms’ performance, as seen in Goldman et al (2009), Amore and Bennedsen (2013).…”

“…Both above measures are market-oriented performance and, as seen in the literature, some of the previous PCs researchers opted to use accounting-based performance. ROA was used by Deng et al (2012), Wu et al (2012), Yu (2013), Ding et al (2014), Gul et al (2016) and Wu et al (2018), while Niessen and Ruenzi (2010), Yu (2013), Liu et al (2018), Azmi et al (2020) and Niazi et al (2021) used ROE. Some of these prior studies chose to use not only one but both measures.…”

“…Prior studies seem unable to consistently conclude whether having PCs on board is beneficial or harmful toward firms’ performance (Fan et al , 2007; Wu et al , 2012). PCs have been proven to have a positive association toward performance or firm value (Azmi et al , 2020; Joni et al , 2020), especially for family firms (Harymawan et al , 2019; Muttakin et al , 2015; Wati et al , 2019) and they are also associated with a lower cost of debt (Bliss et al , 2018; Khwaja and Mian, 2005; Yang et al , 2012), as well as access to government subsidies or bailout programs (Faccio et al , 2006). Politically connected officials’ resignation has also been shown to be detrimental to firms’ performance (Aldhamari et al , 2020; Chen et al , 2020; Chong et al , 2018; Proença et al , 2020; Ren et al , 2020), which further highlights the positive impact of having PCs.…”