Political connections and financial performance: The moderating effect of corporate governance efficacy in Pakistan

Firm performance has become a thriving research field. However, a review of previous studies showed that the answers to several fundamental questions remain vague and require further investigation. Thus, the purpose of this study is twofold; first, to examine the relationship between political connection and company financial performance representing return on assets, return on equity, and Tobin's Q in Pakistani non-financial listed companies. Second, to examine the association between political connection and financial performance with moderating role of director efficacy and audit committee efficacy. This study used the data of 221 companies listed on the Pakistan Stock Exchange over the period 2008-2017. Based on the Panel Regression with Corrected Standard Error, the result showed that political connection has a significant negative effect on company financial performance. With the interaction effect of the director's efficacy further strengthens the relationship between political connection and return on assets. However, the director efficacy weakens the relationship of political connection with return on equity and Tobin’s Q. In addition, the interaction effect of audit committee efficacy weakens the relationship between political connection and firm performance. Thus, the impact of political influence on the corporate sector remains a concern for policymakers, regulators, investors, financial experts, auditors, and academic researchers. Further, an effective board of directors and audit committee can strengthen a company's best practices by controlling political connectedness to protect all the stakeholders’ interests, particularly investors, and restore their confidence. Overall, the findings assist stakeholders to make the right decision when a political connection exists. Finally, this study extends the political connection and corporate governance including financial performance literature by linking the political economy theory in emerging economies like Pakistan.