The moderating role of director’s financial expertise in political connections and corporate financial performance in Pakistan

Murtaza Masud Niazi,Sitraselvi Chandren,Zaleha Othman

doi:10.5267/j.ac.2021.1.022

Abstract

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.

Highlights

IntroductionModern corporations have faced numerous challenges for survival in the 21st century. Among the most significant challenges that need more attention are the appropriate education and financial expertise of company directors, at top-level management
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
The study investigated the impact of political connection on organisational performance in Pakistan

Summary

Introduction

Modern corporations have faced numerous challenges for survival in the 21st century. Among the most significant challenges that need more attention are the appropriate education and financial expertise of company directors, at top-level management. Due to worldwide corporate governance failures and accounting scandals in recent years, interest has grown in studying the role and responsibility of the board of directors in a firm and what tactics companies should use to enhance company performance 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). In Pakistani settings, the prior researchers (e.g., Cheema et al, 2016; Saeed et al, 2016; Sadiq et al, 2019) argued that political connections reduced company financial performance These results provided evidence that engaging politically connected directors (a politician’s relative or close friends, government ownership, civil bureaucracy and military bureaucracy) is not that effective in Pakistan. These directors are unable to understand the complexities and dynamics of the markets in most cases that the incompetence of these boards is clearly shown in their decisions

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Discussion

Conclusion