Abstract
This paper examines how the political connection affects corporate risk (measured by the standard deviation of return on assets and by the standard deviation of the stock return) and performance (measured by the return on equity and the stock return) during periods of adverse macroeconomic conditions in Tunisia. This study uses a sample of 55 Tunisian listed firms during the post-revolution period (2011-2018) and a generalised least square (GLS) approach is applied to test our hypotheses. First, findings show that political connection increases risk-taking behaviour and reduces corporate performance. Secondly, findings confirm that only the relation between the political connection and market risk varies negatively with political instability. Hence, Tunisian investors are reluctant to invest in political connected firms, which lead to market undervaluation.
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