The impact of Corporate Political Connections on Operational Efficiency and Corporate Governance: A test of Political Economy Theory
Subject Areas : Political Developments in Iran
Hossein Jannat Makan
1
*
,
KHATEREH KARGARPOUR
2
,
مهسا کلانترزاده
3
,
Hassan Hanzali
4
1 - Department of Accounting, Ahv.C., Islamic Azad University, Ahvaz, Iran
2 - Department of Accounting, Abadan Branch, Islamic Azad University, Abadan, Iran
3 - دانشگاه علوم تحقیقات خوزستان
4 -
Keywords: Political Connections, Corporate Governance, Operational Efficiency.,
Abstract :
The impact of Corporate Political Connections on Operational Efficiency and Corporate Governance: A test of Political Economy Theory
Abstract:
In many emerging economies, political influence and institutional weakness mutually affect corporate performance and governance. Political economy theory suggests that firms’ access to political power can significantly affect operational efficiency, resource allocation, and the quality of corporate governance mechanisms. Accordingly, this study examines the impact of firms’ political connections on operational inefficiency and corporate governance among listed companies in Iran. The choice of the Iranian context, which often faces government intervention, ownership concentration, and limited transparency, provides valuable empirical evidence on the consequences of political connections. The main motivation for this study is based on two concerns: First, political connections can facilitate firms’ access to resources such as government contracts, preferential regulations, and financial support. Although such benefits can reduce operational inefficiency by reducing costs or providing stability, they may also lead to over-reliance on political rents and reduced long-term competitiveness. Second, political connections can shape corporate governance structures in different ways. On the one hand, these relationships may strengthen oversight, as political actors seek to protect public assets; and on the other hand, they may undermine oversight functions by undermining shareholder rights and reducing transparency.
The statistical population of this study includes 113 Iranian listed and over-the-counter companies during the period 2015-2024. To identify political connections, managers, board members, or major shareholders who have a history of working in government or political institutions are used as the basis. Operational inefficiency was measured through a composite index developed based on Richardson (2006), Beadle et al. (2009), and Chen et al. (2011) and combining the two dimensions of investment efficiency and human resource productivity. The quality of corporate governance was also selected with a checklist adjusted to the conditions of the Iranian stock exchange based on the research of Di Toledo and Boccato (2013) consisting of 22 components.
To test the hypotheses, a multivariate linear regression model with fixed effects of firm and year was used. The empirical results showed that political connections have a positive and significant effect on operational inefficiency; that is, firms with political connections face less inefficiency and achieve higher operational efficiency through optimal resource allocation, control of excess costs, and access to government investment opportunities. This finding is consistent with the predictions of political economy theory.
However, empirical evidence suggests that political connections do not have a significant effect on corporate governance. In other words, although firms with political connections may benefit from some advantages, these advantages do not lead to improved corporate governance measures such as board independence or transparency. This result can be attributed to the dual nature of government intervention; on the one hand, political support prevents market pressures, and on the other hand, the weakness in the implementation of corporate governance laws and standards in Iran makes it difficult to change regulatory structures.
The findings of this study have three important implications: First, for policymakers, evidence shows that although political connections can improve operational efficiency, overreliance on this mechanism will create inequality in access to resources and weaken the competitive environment. Second, for investors, the results indicate the importance of paying attention to the political connection factor in assessing the risk and efficiency of companies in emerging markets. Third, for company managers, the results show that although political connections can create operational benefits in the short term, they will not replace transparent structures and effective corporate governance for sustainable growth. Overall, this study shows that political connections in the Iranian capital market are a double-edged sword; on the one hand, they are aligned with improving operational efficiency, but on the other hand, they do not lead to meaningful changes in corporate governance mechanisms. These findings highlight the need to strengthen regulatory institutions and corporate governance rules to institutionalize the positive effects of political connections in a more transparent and competitive context.
Keywords: Political Connections, Corporate Governance, Operational Efficiency.
JEL classification: D23, G32, M14.
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