The Effect of Political Connection on Firm Performance: Evidence From Russia
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The influence of political connections on companies' operations is one of the most critical aspects of corporate governance, especially for developing countries. However, in the studies, there are two opposing points of view on the direction of the influence of political connections on the performance of companies. On the one hand, the rent-seeking theory and the resource dependence theory imply a positive influence of political ties on the performance of companies by facilitating interaction with underdeveloped institutions or gaining a competitive advantage due to access to limited political resources. On the other hand, the theory of the agency problem reports on the negative influence of politically connected persons in management on the activities of companies, in connection with the use of the resources of affiliated companies by a politician to achieve his goals. Both of these points of view are widely represented in the literature. Thus, using the example of various countries, researchers find empirical evidence in support of these two opposing points of view. Based on panel data for 1999 - 2019, this study examines the impact of political ties on the performance of 1,148 Russian companies. In this paper, during the primary analysis, we find a positive effect of political ties on the return on assets, equity, and investments on Russian companies' example. However, in additional analysis, we find the ambiguous influence of explicit and implicit political ties on the primary sample and, secondly, the negative influence of political ties on the sample consisting of the largest Russian companies. In this regard, this paper proposes an explanation of the ambiguous influence of political ties based on their openness or, on the contrary, closedness from society. This paper also shows an increase in leverage and the share of long-term debt capital of politically related companies. Thus, this work shows that access to debt can be one of the main channels for companies to benefit from political connections. Moreover, this study examines the spread of political affiliation of Russian companies over time, depending on the industry and in the context of geographic location. The paper also shows an increase in the prevalence of political ties among Russian companies by establishing an autocratic political regime. However, this study did not find a statistically significant effect of political connections on the amount of taxes paid by a company.