The influence of political and military connections and ownership structure on firms’ investment efficiency in Pakistan

Corporate political connections are prevalent worldwide and their impact has been investigated in many countries especially in countries with less protected property rights, high levels of corruption, and inadequate legal and institutional protection. Moreover, there is an ongoing academic debate on politicians' interference in commercial business activities. Hence, the existing empirical evidence is equivocal in assessing the impact of this connections on firms' decisions, particularly concerning firm's investment efficiency. This study examined the impact of political connections, military connections, and ownership structure on firm’s investment efficiency in Pakistan from 2011 to 2019. By utilising 257 non-financial firms listed on The Pakistan Stock Exchange, Fixed Effect Regression results revealed that military connections and political connections exert a positive and significant effect on a firm’s investment efficiency, which supports the Resource Dependence Theory’s prediction. Further tests revealed that the positive effects of connections are stronger in nonelection years than in election years. This implied the heightened agency issues faced by connected firms during the election years. The breakdown of the connection variables by the sources of connection (connected Chairman and CEO) is revealing. For political connections, the positive impact does not vary by the type of connection. However, for military connections, the impact of connection due to connected Chairman and CEO is statistically negative and high in magnitude. Except for family ownership, which exhibited a positive and significant impact on investment efficiency, none of the ownership variables were found to be significant. In summary, political and military connections were found to be valuable to Pakistani firms. However, caution must be exercised on military-connected firms controlled by connected Chairman and CEO. Moreover, policymakers need to articulate more efficacious laws to restrain conflicts of interest that could arise from the military-connected CEOs and chairmen surrounding the general election period. This helps the top management make objective and unbiased business deals while maximising shareholders’ value. Therefore, policymakers should design guidelines to monitor business dealings between firms and their connected insiders to minimise wealth expropriation of firms by the connected parties.