THE INFLUENCE OF POLITICAL CONNECTIONS AND OWNERSHIP ON FIRM PERFORMANCE IN PAKISTAN

Abstract

This paper examines the effect of political connections and ownership structure on Pakistani firms’ performance during the period 2010 to 2019. Consistent with the prediction of agency theory, political connection variable is negative and significantly associated with firm performance as measured by ROE, ROA, and Tobin’s Q. We find evidence of the negative (positive) impact of family ownership (institutional and foreign ownership) on Tobin’s Q. Further tests reveal that foreign ownership strengthens the positive association between political connections and firm performance. A plausible explanation to this finding is that firms with high foreign ownership are more able to meet international norms of good governance and corporate practices, which mitigate the potential agency issues arise from political connections. Lastly, we find 2018 general election to exacerbate the negative impact of political connection on Tobin’s Q. Policymakers in Pakistan ought to implement stricter regulatory measures to limit the possible conflict of interest in politically connected firms.