Political Connection and Firm Performance

This paper investigates how political connections affect firm performance. Different from prior studies, we enlarge the scope of political connections to include the board of directors in addition to large shareholders and top management. Besides, we also examine connection types, including connections through political parties, members of parliament, and government ministers. Using a sample of Taiwanese-listed firms from years 2005 to 2011, we find that politically-connected firms have lower accounting performance as well as lower market performance. Further analysis indicates that firms have weaker performance when they have higher proportions of directors serving as central government officers or legislative body representatives. The negative association is not affected by the director's level of professional knowledge and exists both before and after the financial crisis. The results are also consistent across different incentives (including future growth opportunities, financing needs, and tax avoidance) for politically-connected firms.