Empirical Studies in Financial Accounting

The effect of political connections on corporate investment and investment efficiency

Document Type : Research Paper

Authors

Mousa Bozorg Asl 1
Mohammad Ebrahimi noudeh 2
Javid Yarahmadi 3

1 Associate Professor of Accounting Department, Allameh Tabataba’i University, Tehran, Iran.

2 Senior Accounting Expert, Allameh Tabataba'i University, Tehran, Iran.

3 Ph.D student, Research Sciences University Islamic Azad University, Tehran, Iran

https://doi.org/10.22054/qjma.2022.63860.2318
Abstract
This research has been conducted with the aim of experimental test of the effect of political relations on the amount of investment of companies and its efficiency in the period of 2012 to 2019 of companies listed in the Tehran Stock Exchange. The method of data collection is archival and reference to databases and the method of data analysis is multivariate regression model using panel data model and fixed effects method. The results show that the relationship between political relations and the amount of investment as well as investment efficiency is positive and significant. These results indicate that companies with political connections have more investment than other companies and investment efficiency is higher in companies with political connections. According to the research findings, it can be seen that companies with political connections invest more and more efficiently than other companies due to their government benefits and privileges, as well as the ease of attracting financial resources.

Keywords

political connections
investment
investment efficiency. political economy theory
Subjects
  1. Berkman, H. & Galpoththage, V. (2016). Political connections and firm value: an analysis of listed firms in Sri Lanka. Pacific Accounting Review, 28(1), http://dx.doi.org/10.1108/PAR-06-2014-0020.
  2. Bliss, M. A. & Guol, F. A. (2012). Political connection and cost of debt: Some Malaysian evidence, Journal of Banking & Finance, 36(5), 1520 –1527.
  3. Boubekri, N., Claode, J., & Safaar, W. (2012). The impact of political connections on firms operating performance and financing decisions. The Journal of Financial Research, 2(3), 397-423.
  4. Chen, F., Hape, O.K., Le, Q., & Wang, X. (2011). Financial Reporting Quality and Investment Efficiency of Private Firms in Emerging Markets. The Accounting Review, 86 (4), 1255–1288.
  5. Civilize, S., Wongchoti, U., & Young, M. (2015). Political Connection and Stock Returns: A Longitudinal Study. The Financial Review, 50, 89–119.
  6. Claessens, S., Fejien, E., & Laeven, L. (2008). Political connections and preferential access tofinance: The role of campaign contributions. Journal of Financial Economics, 88 (3), 554-580.
  7. D. (2012). Political Connection and Firm Value – Theory and Indian Evidence, papers.ssrn.com/sol٣/papers.cfm
  8. Faccio, M., Masulis, R. & McConnell, J.J. (2006). Political Connections and Corporate Bailouts. Journal of Finance, 61, 2597-2635.
  9. Hu, F., Stewart, J., & Tan, W. (2017). CEO’s political connections, institutions and audit opinions. Pacific Accounting Review, 29 (3), 283-306, https://doi.org/10.1108/PAR-04-2016-0047
  10. Jiang, F., Kim, K.A., Nofsinger, J.R., & Zhu, B. (2015). Product market competition and corporate investment. Journal of Corporate Finance, 35,196-210
  11. Goldman, E., Rocholl, J., & So, J. (2009). Do politically connected boards affect firm value? The Review of Financial Studies, 22, 2331-2360.
  12. Habib, A., Muhammadi, A., & Jiang, H. (2017). Political Connections and Related Party Transactions: Evidence from Indonesia. The International Journal of Accounting, 52, 45-63.
  13. Hassan, T., Hassan, M. K., & Mohamad, S. (2012). Political patronage and firmperformance: Further evidence from Malaysia. Thunderbird International Business Review, 54 (3), 373-393.
  14. Housten, J. F., Jieng, L., Lin, C., & Me, Y. (2014). Political connections and the cost of bank loans. Journal of Accounting Research, 52 (1), 193-243.
  15. How, Janice, Verhoeven, Peter, and AbdulWahab, Effiezal Aswadi. (2014).
  16. “political connections and analyst following in Malaysia”. Economic Modelling, 43, 158-167.
  17. 158–167.Hung, M., Wong, T.J., Zhang, T. (2012). Political considerations in the decision of Chinese SOEs to list in Hong Kong. Journal of Accounting and Economics, 53, 435–44
  18. Lenard, M. J. & Yu, B. (2013). Do Earnings Management and Audit Quality Influence Over-Investment by Chinese Companies?. International Journal of Economics and Finance, 4(2), 21-30.
  19. Li,G., & Zhou, H. (2015). Political connections and access to IPO markets in China, China Economic Review, 33,76-93.
  20. Lin K. J., Karim E. K., & Carter C. (2015). Why does China's stock market have highly synchronous stock price movements? An information supply perspective. Advances in Accounting, 31(1), 68-791.
  21. Nelly Sari, R. & Anugerah, R. (2011). The Effect Of Corporate Transparency On Firm Performance: Emperical Evidence From Indonesian Listed Companies. Modern Accounting and Auditing, 7(8), 773-783.
  22. Niessen, A., & Ruenzi, S. (2012). Political Connectednessand Firm Performance: Evidence From Germany. CFR-Working Paper 07-15
  23. Orlitzky, M. (2011). Does firm size confound the relationship between corporate social performance and firm financial performance?. Journal of Business Ethics, 33(2), 167-180.
  24. Pan, X., & Tian, G. G. (2017). Political connections and corporate investments: Evidence from the recent anti-corruption campaign in China. Journal of Banking and Finance, 119, DOI: 10.1016/j.jbankÞn.2017.03.005.
  25. Piotroski, J., & Zhang, T. (2014). Politicians and the IPO decision: The impact of impending political promotions on IPO activity in China. Journal of Financial Economics, 111 (1), 111-136.
  26. Tahoun, A. (2014). The role of stock ownership by US members of Congress on the market for political favors. Journal of Financial Economics, 111(1), 86-110.
  27. Tollison, R.D. (1982). Rent seeking: A survey, Kyklos 35, 575–602.
  28. Xiong, J. (2016). Stock Liquidity and Frim Investment Evidence from Chinese Listed Companies. Journal of Business Theory and Practice, 4 (1), 25-50.
  29. Yu, X., Yao, Y., Zheng, H., & Zhang, L. (2020). The role of political connection on overinvestment of Chinese energy firms. Energy economics, 85, 1-38.
  30. Abbaszadeh, M.R., Rajabalizadeh, J., & Qanad, M. (2019). Political relations, transactions with affiliates and profit management in companies listed on the Tehran Stock Exchange. Empirical studies of financial accounting, 63, 129 -155. [In Persian]
  31. Badavar Nahandi, Y., & Taghizadeh Khaneghah, V. (2014). Relationship between some mechanisms of corporate governance and investment efficiency in life cycle stages. Accounting knowledge, 5(18), 113-140. [In Persian]
  32. Badavar Nahandi, Y., Taghizadeh Khaneghah, V. (2014). Investigating the Relationship between Audit Quality and Investment Efficiency, Accounting and Auditing Reviews, 20 (2), 42-19. [In Persian]
  33. Badavar Nahandi, Y., Taghizadeh Khaneghah, V. (2018). The effect of political communication on overinvestment and firm performance, Accounting and auditing reviews, 25 (2), 198-181. [In Persian]
  34. Hassanzadeh Brothers, R., Badavarhandi, Y., & Guardian, L. (2014). The Impact of Financial Constraints and Agency Costs on Investment Efficiency. Financial Accounting Research, 6 (1), 106-89. [In Persian]
  35. Hosseini, S. A., & Bahiraei, A. (2019). The Impact of Political Communication on Voluntary Disclosure in the Tehran Stock Exchange. Empirical Studies in Financial Accounting, 16(62), 151 -175. [In Persian]
  36. Kashanipour, M., Faraji, O., & Burji, P. (2019). Political communication, corporate governance and tax revenue. Accounting knowledge, 10 (4), 143-175. [In Persian]
  37. Kian (2014). The relationship between corporate governance mechanisms and investment efficiency in companies with diverse products. International Conference on Accounting, Economics and Financial Management. [In Persian]
  38. Mahmoudabadi, H., & Najafi, Z. (2013). The role of information transparency in explaining the relationship between government political support and the performance of companies listed on the Tehran Stock Exchange. Journal of Management Accounting, 6(18). [In Persian]
  39. Mahmoudabadi, H., & Rajaei, S. (2014). Assessing the relationship between agency costs and investment efficiency in companies listed on the Tehran Stock Exchange. Accounting Research, 15. [In Persian]
  40. Mehdi Fard, M.R. (2015). Political management and stock prices of companies listed on the stock exchange: a test of political economy theory. Quarterly Journal of Financial Knowledge of Securities Analysis, 8(25), 19-19. [In Persian]
  41. Mehrabanpour, M.R., Jandaghi Qomi, M., & Mohammadi, M. (2017). Investigating the effect of corporate political relations on the use of unusual transactions with affiliates. Bi-Quarterly Journal of Behavioral Value Accounting. 3, 147-168. [In Persian]
  42. Rahnama Roodpashti, F., & Mohseni, A. (2018). Political Relations, Cash Profit and Stock Returns in Companies Listed on the Tehran Stock Exchange. Financial Knowledge of Securities Analysis, 11(38), 129-144. [In Persian]
  43. Salehi, M.; Torchi, M., & Abdullah Nejad, R. (2020). The effect of transactions with related parties on the relationship between political communication and the delay in the audit report. Empirical Research in Accountig., 26 (9), 249-268. [In Persian]
Empirical Studies in Financial Accounting
Volume 19, Issue 75
Autumn 2022
Pages 69-94

  • Receive Date 16 October 2021
  • Revise Date 22 January 2022
  • Accept Date 11 April 2022

Editorial Boards

Submit Manuscript

Article Processing Charges

Contact Us