We examine the association between political connectedness and firm performance by applying the generalised quantile regression (GQR) method. The prior literature reveals mixed and contradicting evidence on the economic and financial consequences of political connected firms (PCFs) in context of different countries. In this study, we address this issue and contribute to the extant literature in the following ways. First, the study employs the GQR approach to assess the impact of PCFs on firm performance using panel data for Pakistani listed firms. The GQR method has an advantage over traditional methods as it ascertains the magnitude and intensity of the influence of PCFs on high-performing and low-performing firms and handles the potential endogeneity problem. Moreover, this method generates efficient, robust and consistent estimations even when the conditional distribution is not normal. Second, the quantile regression analysis provides a better understanding of the relationship between PCFs and firm performance. Hence it addresses the weaknesses in the prior research, which could be attributed to the use of the ordinary least squares technique, that resulted in contradictory evidence. Last, the study assesses the annual data of 190 Pakistani listed firms including politically connected and non-politically connected firms, over the period 2007–2014 that were listed on the Pakistan Stock Exchange.
The findings depict negative association between PCFs and firm performance. In addition, the negative linkage is stronger for low-performing firms compared to high-performing firms. The analysis unravels that the political connections of the board directors impact firm performance negatively in different performance distributions. The results of this study are in line with the proposition that easier access to finance and increased rent-seeking activities make PCFs less profitable. The findings have implications for management, academicians, regulators, and shareholders. From the management perspective, it is imperative to formulate efficient investment strategies and evade rent-seeking transactions. Moreover, the government and policy-makers have to establish strong monitoring and regulatory mechanisms, especially in case of low-performing politically connected firms, to safeguard the interests of the minority shareholders. From an academician’s perspective, it is evident that the quantile regression analysis provides better and robust estimation results especially when the data is not normally distributed.
