Firm financial performance in the wake of political turmoil; whether political connection is propitious?

Abstract

Purpose This study aims to investigate the effect of political turmoil on the firm financial performance, particularly in presence of politically affiliated board of directors. Design/methodology/approach The study applied panel regression analyses on a data set of Pakistan’s listed companies ranged over 14 years, spanning from 2007 to 2021. Political turmoil was first gauged through three determinants, i.e. political protest, government election and constitutional reform, and thereafter, economic uncertainty index was used as a proxy for political turmoil. For the purpose of political connection, the study used political affiliation of the board of directors. Findings The study finds that political turmoil has deleterious effect on the return on assets and Tobin’s Q. The study further unveils that politically affiliated firms are relatively insulated from the volatility posed by the political uncertainty and exhibit significantly better financial outcomes. Practical implications Findings of the study suggest that appropriate composition of the board is imperative in offsetting the risk posed by the political turmoil. Hence, the results are useful for investors, policymakers and regulators to ensure financial soundness of firms in the wake of political turmoil. Originality/value To the best of the authors’ knowledge, this is the first study that investigates the moderating impact of political connection on the performance of companies in presence of political turmoil.