To read this content please select one of the options below:

Does political connection affect corporate financial performance? The moderating role of directors’ financial expertise

Anis EL Ammari (Department of Finance and Accounting, Faculty of Economics and Management of Mahdia, Mahdia, Tunisia)

Journal of Financial Reporting and Accounting

ISSN: 1985-2517

Article publication date: 31 January 2022

Issue publication date: 20 November 2023

689

Abstract

Purpose

This paper aims to examine the effects of political connections (PCs) on corporate financial performance (CFP) in an emerging economy. It also investigates the moderating influence of the directors’ financial expertise (DFE) on the relationship between politically connected firms and their financial performance.

Design/methodology/approach

The study sample includes 304 firm-year observations from non-financial Tunisian listed firms covered over 2012–2019. Financial data are from various sources: financial statements, annual reports, official bulletins of the Tunisian Stock Exchange (TSE) and the Financial Market Council. PCs and DFE data are manually collected from the TSE and companies’ websites. Multivariate regression analyses are used to test the research hypotheses.

Findings

The results show that PCs negatively affect CFP and the DFE is a moderator variable that exacerbates this negative relationship. These results could be explained on the one hand by the fact that politicians often lack management, professionalism and know-how. On the other hand, political members on boards focus mainly on their political agendas and prioritize their interests rather than firm performance. Furthermore, board directors are more inclined towards the grabbing-hand approach to create personal linkages with these politicians and take personal benefits rather than protect the interests of minority shareholders and effectively use firm resources.

Research limitations/implications

The most important limitation of the study is the small number of non-financial TSE-listed firms. Indeed, the small sample size prevents us from considering industry specificities and working in a homogeneous environment.

Practical implications

This study recommends that external investors pay particular attention to politically connected firms as PCs tend to weaken corporate governance. Also, it helps policymakers better assess the need to harmonize and develop corporate governance standards and practices that account for the specific conditions in Tunisia to mitigate the lobbying of political parties and supervise their abuse of power. Furthermore, the negative relationship between PCs and CFP in a poorly regulated and governed country could be used by financial institutions in their credit scoring.

Social implications

The findings suggest that the nexus between politics and business draws attention to corruption post-revolution.

Originality/value

The originality and the relevance of this study consist in studying the moderating effect of the DFE on the association between PCs and CFP. To the best of the author’s knowledge, this study pioneers assessing the role of the DFE as a moderating variable. It also supplements prior literature by examining the combined factors, such as PCs and DFE, on CFP in an emerging market.

Keywords

Acknowledgements

The author wants to thank the tow anonymous referees for their thoughtful comments and suggestions, which have dramatically contributed to the improvement of this paper.

Funding: This research received no external funding.

Citation

EL Ammari, A. (2023), "Does political connection affect corporate financial performance? The moderating role of directors’ financial expertise", Journal of Financial Reporting and Accounting, Vol. 21 No. 5, pp. 1073-1099. https://doi.org/10.1108/JFRA-08-2021-0257

Publisher

:

Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

Related articles