Hostname: page-component-797576ffbb-bqjwj Total loading time: 0 Render date: 2023-12-04T14:48:56.427Z Has data issue: false Feature Flags: { "corePageComponentGetUserInfoFromSharedSession": true, "coreDisableEcommerce": false, "useRatesEcommerce": true } hasContentIssue false

Firm-specific characteristics, political connections, and financial outcomes: Evidence from Indian firms

Published online by Cambridge University Press:  14 February 2022

Surender Rao Komera*
Indian Institute of Management Amritsar, Inside Govt. Polytechnic Campus, GT Road, Chheharta, Amritsar – 143105; Punjab, India
Santosh Kumar Tiwari
Indian Institute of Management Amritsar, Inside Govt. Polytechnic Campus, GT Road, Chheharta, Amritsar – 143105; Punjab, India
*Corresponding author: Surender Rao Komera, Emails:,


Our selection and endogeneity corrected findings suggest that firms' political connections negatively influence their market value. We find that firms with a larger size, more operationally efficient in utilizing their assets, and those operating in more concentrated industries benefit more from the political connections than the otherwise corresponding firms. We also report that political connections do not influence firms' leverage choices. However, we find that politically connected firms with higher leverage have significantly lower market value. Further, we note that political connections help the firms operating in unregulated but more concentrated industries, probably to obtain ‘private benefits’, leading to their higher market value. Overall, our results indicate that the effect of political connections is not homogeneous across the sample firms. They also raise questions on the motivation of sample firms' political connections, suggesting that these firms probably obtain political connections for reasons other than enhancing their market value.

Research Article
Copyright © The Author(s), 2022. Published by Cambridge University Press on behalf of V.K. Aggarwal

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)


Agrawal, Anup, and Knoeber, Charles R. 2001. “Do Some Outside Directors Play a Political Role?” Journal of Law & Economics 44 (1): 179–98. Scholar
Aggarwal, Raj, Jindal, Varun, and Rama, Seth. 2019. “Board Diversity and Firm Performance: The Role of Business Group Affiliation.” International Business Review 28 (6): 101600. Scholar
Aggarwal, Rajesh K., Meschke, Felix, and Wang, Tracy Yue. 2012. “Corporate Political Donations: Investments or Agency?” Business and Politics 14 (1): 138. Scholar
Ahsan, Reshad N. 2013. “Input Tariffs, Speed of Contract Enforcement, and the Productivity of Firms in India.” Journal of International Economics 90 (1): 181–92. Scholar
Akey, Pat, and Lewellen, Stefan. 2017. “Policy Uncertainty, Political Capital, and Firm Risk-Taking.” Scholar
Anderson, Ronald C., and Reeb, David M.. 2003. “Founding-Family Ownership, Corporate Diversification, and Firm Leverage.” Journal of Law and Economics 46 (2): 653–84. Scholar
Arnoldi, Jakob, and Muratova, Yulia. 2019. “Unrelated Acquisitions in China: The Role of Political Ownership and Political Connections.” Asia Pacific Journal of Management 36 (1): 113–34. Scholar
Baker, Scott R., Bloom, Nicholas, and Davis, Steven J.. 2016. “Measuring Economic Policy Uncertainty.” The Quarterly Journal of Economics 131 (4): 15931636. Scholar
Bao, Xiaolu, Johan, Sofia, and Kutsuna, Kenji. 2016. “Do Political Connections Matter in Accessing Capital Markets? Evidence from China.” Emerging Markets Review 29: 2141. Scholar
Barney, Jay. 1991. “Firm Resources and Sustained Competitive Advantage.” Journal of Management 17 (1): 99120. Scholar
Bertrand, Marianne, Kramarz, Francis, Scholar, Antoinette, and Thesmar, David. 2018. “The Cost of Political Connections.” Review of Finance 22 (3): 849–76. Scholar
Bhagat, Sanjai, Moyen, Nathalie, and Suh, Inchul. 2005. “Investment and Internal Funds of Distressed Firms.” Journal of Corporate Finance 11 (3): 449–72. Scholar
Bharadwaj, Anandhi S., Bharadwaj, Sundar G., and Konsynski, Benn R.. 1999. “Information Technology Effects on Firm Performance as Measured by Tobin's Q.” Management Science 45 (7): 1008–24. Scholar
Bhuyan, Sanjib. 2000. “Corporate Political Activities and Oligopoly Welfare Loss.” Review of Industrial Organization 17 (4): 411–6. Scholar
Bliss, Mark A., and Gul, Ferdinand A.. 2012. “Political Connections and Cost of Debt: Some Malaysian Evidence.” Journal of Banking & Finance 36 (5): 1520–27. Scholar
Blundell, Richard, and Bond, Stephen. 1998. “Initial Conditions and Moment Restrictions in Dynamic Panel Data Models.” Journal of Econometrics 87 (1): 115–43. Scholar
Boateng, Agyenim, Liu, Yang, and Brahma, Sanjukta. 2019. “Politically Connected Boards, Ownership Structure and Credit Risk: Evidence from Chinese Commercial Banks.” Research in International Business and Finance 47: 162–73. Scholar
Boubakri, Narjess, Mansi, Sattar A., and Saffar, Walid. 2013. “Political Institutions, Connectedness, and Corporate Risk Taking.” Journal of International Business Studies 44 (3): 195215. Scholar
Cao, Xiaping, Pan, Xiaofei, Qian, Meijun, and Tian, Gary Gang. 2017. “Political Capital and CEO Entrenchment: Evidence from CEO Turnover in Chinese Non-SOEs.” Journal of Corporate Finance 42: 114. Scholar
Chahal, Rishman Jot Kaur, and Ahmad, Wasim. 2020. “Political Connections, Investment Inefficiency, and the Banking Crisis.” The Quarterly Review of Economics and Finance. Scholar
Chaney, Paul K., Faccio, Mara, and Parsley, David. 2011. “The Quality of Accounting Information in Politically Connected Firms.” Journal of Accounting and Economics 51 (1–2): 5876. Scholar
Chen, Carl R., Li, Yingqi, Luo, Danglun, and Zhang, Ting. 2017. “Helping Hands or Grabbing Hands? An Analysis of Political Connections and Firm Value.” Journal of Banking & Finance 80: 7189. Scholar
Chen, Gongmegn, Firth, Michael, and Xu, Liping. 2009. “Does the Type of Ownership Control Matter? Evidence from China's Listed Companies.” Journal of Banking & Finance 33: 171–81. Scholar
Chen, Shimin, Sun, Zheng, Tang, Song, and Wu, Donghui. 2011. “Government Intervention and Investment Efficiency: Evidence from China.” Journal of Corporate Finance 17 (2): 259–71. Scholar
Croci, Ettore, Pantzalis, Christos, Park, Jung Chul, and Petmezas, Dimitris. 2017. “The Role of Corporate Political Strategies in M&As.” Journal of Corporate Finance 43: 260–87. Scholar
Deng, Ziliang, Yan, Jiayan, and van Exxen, Marc. 2018. “Heterogeneity of Political Connections and Outward Foreign Direct Investment.” International Business Review 27 (4): 893903. Scholar
Dharwadkar, Rav, George, Gerard, and Brandes, Pamela. 2000. “Privatization in Emerging Economies: An Agency Theory Perspective.” The Academy of Management Review 25 (3): 650–69. Scholar
Dinc, I. Serdar. 2005. “Politicians and Banks: Political Influence on Government-Owned Banks in Emerging Markets.” Journal of Financial Economics 77 (2): 453–79. Scholar
Dowell, Glen, Hart, Stuart, and Yeung, Bernard. 2000. “Do Corporate Global Environmental Standards Create or Destroy Market Value?” Management Science 46 (8): 1059–74. Scholar
Faccio, Mara. 2006. “Politically Connected Firms.” American Economic Review 96: 369–86. Scholar
Faccio, Mara. 2010. “Differences between Politically Connected and Nonconnected Firms: A Cross-Country Analysis.” Financial Management 39 (3): 905–27. Scholar
Faccio, Mara, Masulis, Ronald W., and McConnell, John J.. 2006. “Political Connections and Corporate Bailouts.” Journal of Finance 61 (6): 25972635. Scholar
Fairfield, Patricia M., and Yohn, Teri Lombardi. 2001. “Using Asset Turnover and Profit Margin to Forecast Changes in Profitability.” Review of Accounting Studies 6 (4): 371–85. Scholar
Fama, Eugene F., and French, Kenneth R.. 1997. “Industry Costs of Equity.” Journal of Financial Economics 43 (2): 153–93. Scholar
Fan, Joseph P. H., Wong, T. J., and Zhang, Tianyu. 2007. “Politically Connected CEOs, Corporate Governance, and Post-IPO Performance of China's Newly Partially Privatized Firms.” Journal of Financial Economics 84 (2): 330–57. Scholar
Fisman, Raymond. 2001. “Estimating the Value of Political Connections.” The American Economic Review 91 (4): 10951102. Scholar
Frank, Murray Z., and Goyal, Vidhan K.. 2009. “Capital Structure Decisions: Which Factors Are Reliably Important?” Financial Management 38 (1): 137. Scholar
Fraser, Donald R., Zhang, Hao, and Derashid, Chek. 2006. “Capital Structure and Political Patronage: The Case of Malaysia.” Journal of Banking & Finance 30 (4): 12911308. Scholar
Goldman, Eitan, Rocholl, Jorg, and So, Jongil. 2009. “Do Politically Connected Boards Affect Firm Value?” Review of Financial Services 22 (6): 2331–60. Scholar
Gopalan, Radhakrishnan, Nanda, Vikram, and Seru, Amit. 2007. “Affiliated Firms and Financial Support: Evidence from Indian Business Groups.” Journal of Financial Economics 86 (3): 759–95. Scholar
Rajeev, Gowda M. V., and Sharalaya, Nandan. 2016. “Crony Capitalism and India's Political System.” In Crony Capitalism in India, edited by Khatri, N. and Ojha, A. K.. Palgrave Studies in Indian Management. London: Palgrave Macmillan.Google Scholar
Greene, William H. (2003). Econometric Analysis. Pearson Education, Inc., New Jersey.Google Scholar
Grier, Kevin B., Munger, Michael C., and Roberts, Brian E.. 1994. “The Determinants of Industry Political Activity, 1978–1986.” The American Political Science Review 88 (4): 911–26. Scholar
Guha-Khasnobis, Basudeb, and Bhaduri, Saumitra N.. 2002. “Determinants of Capital Structure in India (1990–1998): A Dynamic Panel Data Approach.” Journal of Economic Integration 17 (4): 761–76. Scholar
Gul, Ferdinand A. 2006. “Auditor's Response to Political Connections and Cronyism in Malaysia.” Journal of Accounting Research 44 (5): 931–63. Scholar
Hadani, Michael, and Schuler, Douglas A.. 2013. “In Search of El Dorado: The Elusive Financial Returns on Corporate Political Investments.” Strategic Management Journal 34 (2): 165–81. Scholar
Hansen, Wendy L., Mitchell, Neil J., and Drope, Jeffrey M.. 2005. “The Logic of Private and Collective Action.” American Journal of Political Science 49 (1): 150–67. Scholar
Hart, David M. 2003. “Political Representation in Concentrated Industries: Revisiting “Olsonian Hypothesis.” Business and Politics 5 (3): 261–86. Scholar
Heckman, James J. 1979. “Sample Selection Bias as a Specification Error.” Econometrica 47 (1): 153–61. Scholar
Hillman, Amy J. 2005. “Politicians on the Board of Directors: Do Connections Affect the Bottom Line?” Journal of Management 31 (3): 464–81. Scholar
Jackowicz, Kryzysztof, Kozlowski, Lukasz, and Mielcarz, Pawel. 2014. “Political Connections and Operational Performance of Non-financial Firms: New Evidence from Poland.” Emerging Markets Review 20: 109–35. Scholar
Johnson, Simon, and Mitton, Todd. 2003. “Cronysim and Capital Control: Evidence from Malaysia.” Journal of Financial Economics 67 (2): 351–82. Scholar
Keefe, Michael O'Connor. 2019. “A Theory of Political Connections and Financial Outcomes.” International Review of Economics and Finance 61: 108–27. Scholar
Khanna, Tarun, and Palepu, Krishna G.. 2000. “Is Group Affiliation Profitable in Emerging Markets: An Analysis of Diversified Indian Business Groups.” The Journal of Finance 55 (2): 867–91. Scholar
Khanna, Tarun, and Palepu, Krishna G.. 2010. Winning in Emerging Markets: A Road Map for Strategy and Execution. Boston: Harvard Business Press.Google Scholar
Khanna, Tarun, and Yafeh, Yishay. 2007. “Business Groups in Emerging Markets: Paragons or Parasites?” Journal of Economic Literature 45 (2): 331–72.CrossRefGoogle Scholar
Khwaja, Asim Ijaz, and Mian, Atif. 2005. “Do Lenders Favour Politically Connected Firms? Rend Provision in an Emerging Financial Market.” Quarterly Journal of Economics 120 (4): 13711411. Scholar
Komera, Surenderrao, Jijo Lukose, P. J., and Sasidharan, Subash. 2018. “Does Business Group Affiliation Encourage R&D Activities? Evidence from India.” Asia Pacific Journal of Management 35: 887917. Scholar
Kshetri, Nir, and Dholakia, Nikhilesh. 2011. “Regulative Institutions Supporting Entrepreneurship in Emerging Economies: A Comparison of China and India.” Journal of International Entrepreneurship 9 (2): 110–32. Scholar
Laborda, Juan, Salas, Vicente, and Suarez, Cristina. 2020. “Manufacturing Firms’ Export Activity: Business and Financial Cycle Overlaps!International Economics 162: 114. Scholar
La Porta, Rafael, Lopez-De-Silanes, Florencio, and Shleifer, Andrei. 2002. “Government Ownership of Banks.” The Journal of Finance 57 (1): 265301. Scholar
Leuz, Christian, and Oberholzer-Gee, Felix. 2006. “Political Relationships, Global Financing, and Corporate Transparency: Evidence from Indonesia.” Journal of Financial Economics 81 (2): 411–39. Scholar
Li, Hongbin, Meng, Lingsheng, Wang, Qian, and Zhou, Li-An. 2008. “Political Connections, Financing, and Firm Performance: Evidence from Chinese Private Firms.” Journal of Development Economics 87 (2): 283–99. Scholar
Luo, Xiaowei Rose, Yang, Ling, and He, Xiaobin. 2020. “Can One Stone Kill Two Birds? Political Relationship Building and Partner Acquisition in New Ventures.” Entrepreneurship Theory and Practice 44 (4): 817–41. Scholar
Manos, Ronny, Murinde, Victor, and Green, Christopher. 2007. “Leverage and Business Group: Evidence from Indian Firms.” Journal of Economics and Business 59 (5): 443–65. Scholar
Mello, Antonio S., and Parsons, John E.. 1992. “Measuring the Agency Cost of Debt.” The Journal of Finance 47 (5): 18871904. Scholar
Molitor, Graham T. T. 1977. “How to Anticipate Public-Policy Changes. S.A.M.” Advanced Management Journal Summer: 413.Google Scholar
Morck, Randall, Shleifer, Andrei, and Vishny, Robert W.. 1988. “Management Ownership and Market Valuation: An Empirical Analysis.” Journal of Financial Economics 20: 293315. Scholar
Murali, Kanta. 2019. “Economic Liberalization and the Structural Power of Business.” In Business and Politics in India, edited by Jaffrelot, Christophe, Kohli, Atul, and Murali, Kanta. New York: Oxford University Press.Google Scholar
Nickell, Stephen. 1981. “Biases in Dynamic Models with Fixed Effects.” Econometrica 49 (6): 1417–26. Scholar
Olson, Mancur. 1965. The Logic of Collective Action: Public Goods and the Theory of Groups. Cambridge, MA: Harvard University Press.Google Scholar
Pfeffer, Jeffrey. 1972. “Size and Composition of Corporate Boards of Directors: The Organization and Its Environment.” Administrative Science Quarterly 17 (2): 218–28. Scholar
Pfeffer, Jeffrey, and Salancik, Gerald R.. 1978. The External Control of Organizations: A Resource Dependence Perspective. Stanford, CA: Stanford University Press.Google Scholar
Pittman, Russell. 1977. “Market Structure and Campaign Contributions.” Public Choice 31 (3): 3752. Scholar
Pittman, Russell. 1988. “Rent-Seeking and Market Structure: Comment.” Public Choice 58 (2): 173–85. Scholar
Rajan, Raghuram G., and Zingales, Luigi. 1995. “What Do We Know about Capital Structure? Some Evidence from International Data.” The Journal of Finance 50 (5): 1421–60. Scholar
Saeed, Abubakr, Belghitar, Yacine, and Clark, Ephraim. 2017. “Political Connections and Firm Operational Efficiencies: Evidence from a Developing Country.” Review of Managerial Science 11 (1): 191224. Scholar
Santarelli, Enrico, and Tran, Hien Thu. 2016. “Diversification Strategies and Firm Performance in Vietnam.” Economics of Transition 24 (1): 3168. Scholar
Semykina, Anastasia, and Wooldridge, Jeffrey M.. 2010. “Estimating Panel Data Models in the Presence of Endogeneity and Selection.” Journal of Econometrics 157 (2): 375–80. Scholar
Shah, Rajiv R., Gao, Zhijie, and Mittal, Harini. 2015. Innovation, Entrepreneurship, and the Economy in the US, China, and India: Historical Perspectives and Future Trends. New York; Academy Press.Google Scholar
Shleifer, Andrei, and Vishny, Robert W.. 1994. “Politicians and Firms.” The Quarterly Journal of Economics 109 (4): 9951025. Scholar
Thompson, James D. 1967. Organisation in Action: Social Science Bases of Administrative Theory. New York: McGraw Hill.Google Scholar
Tirole, Jean. 2006. The Theory of Corporate Finance. Princeton: Princeton University Press.Google Scholar
Tuschke, Anja, and Sanders, W. Gerard. 2003. “Antecedents and Consequences of Corporate Governance Reform: The Case of Germany.” Strategic Management Journal 24 (7): 631–49. Scholar
Villalonga, Belen, and Amit, Raphael. 2006. “How Do Family Ownership, Control and Management Affect Firm Value?” Journal of Financial Economics 80 (2): 385417. Scholar
Wang, Lihong, and Lin, Philip T.. 2017. “Who Benefit from Political Connections? Minority Investors or Controlling Shareholders.” Asia-Pacific Journal of Accounting & Economics 24 (1–2): 122. Scholar
Wang, Xia, Feng, Mingming, and Xu, Xiaodong. 2019. “Political Connections of Independent Directors and Firm Internationalization: An Empirical Study of Chinese Listed Firms.” Pacific-Basin Finance Journal 58: 101205. Scholar
Wu, Wenfeng, Wu, Chongfeng, and Rui, Oliver M.. 2010. “Ownership and the Value of Political Connections: Evidence from China.” European Financial Management 18 (4): 695729. Scholar
Zaleski, Peter A. 1992. “Campaign Contributions from Corporate PACs.” Atlantic Economic Journal 20 (3): 5765. Scholar
Zardkoohi, Asghar. 1985. “On the Political Participation of the Firm in the Election Process.” Southern Economic Journal 51 (3): 804–17. Scholar
Zhu, Hongjin, and Chung, Chi-Nien. 2014. “Portfolios of Political Ties and Business Group Strategy in Emerging Economies: Evidence from Taiwan.” Administrative Science Quarterly 59 (4): 599638. Scholar