The effect of political connections on companies’ performance and value

Abstract

PurposeThe purpose of this paper is to examine the effect of companies’ political connections (PCs) on their financial and stock performance, as well as on their market values.Design/methodology/approachA sample of non-financial companies listed on the Tunis Stock Exchange (TSE) between 2012 and 2014 was used. The accounting and financial data of these companies were obtained from their financial statements, whereas data on PCs of their officers and directors were collected manually from various sources. Correlation and multivariate regression analyses were performed to test the hypothesis of this research.FindingsThe results showed that PCs improve companies’ performance and value. These results could be explained, on the one hand, by the benefits and favors that companies can get from their political ties and, on the other hand, by investors’ tendency to invest in politically connected companies to benefit from these advantages.Research limitations/implicationsThe limited number of non-financial companies listed on the TSE is a limit for this research.Practical implicationsThe results show that investment in companies which are politically inter-connected may be beneficial for investors, and especially for small minority shareholders.Social implicationsThe results confirm that political links are essential for business success in emerging economies, such as Tunisia. However, the positive link between politics and business might highlight the issue of corruption after the revolution.Originality/valueTo the best of the authors’ knowledge, this is the first study to examine the effect of PCs on the performance and value of Tunisian companies after the 2011 revolution.