No abstract

This study investigates the impact of political connections on the awarding of government contracts to Canadian companies. Two-stage least squares (2SLS) analyses were performed on a sample of S&P/TSX companies from 2010 to 2014 inclusively. The results show that political connections are positively and significantly associated with the winning of government contracts. Politically connected firms obtain more government contracts and higher contract values than non-connected firms. Political connections thus appear to be directly associated with securing government contracts in the Canadian context. Firms can view political connections as a non-market, long-term strategy to help them gain competitive advantages and improve their performance. Accordingly, they tend to appoint directors and managers taking these connections and the advantages that can be gained into account. However, they must seriously consider the cost-benefit ratio of this strategy. For example, the costs incurred could be ethical in nature and firms could find themselves in a position of conflict of interest that could lead to extensive negative media exposure. These results alert regulatory and governmental organizations to the need for them to remain vigilant and to strengthen corporate governance regulations to prevent the excesses and abuses that could arise from firms' political actions. Our study is the first to demonstrate a direct relationship between corporate political connections and government contracts in the Canadian context. The results confirm the growing interdependence between politics and business, particularly the increase in the number of corporate actions intended to influence government decisions.

Corporate governance best practices, especially when not mandated, usually mitigate risk and provide value added (Agrawal & Knober, 1996). Many authors have demonstrated a link between corporate governance and institutional and regulatory environments (Claessens & Yurtoglu, 2012;LaPorta, Lopez-de-Silanes, Shleifer & Vishny 1998;Liu, 2006;Matoussi & Jardak, 2012) and even political power (Claessens & Yurtoglu, 2012). Political connections are known to result in numerous privileges for firms, such as decreased regulatory oversight (Faccio, 2006) and improved financial performance. This paper investigates compliance with governance regulations and political connections as separate topics, as other studies have done, but also looks at their combined effect by analyzing data on the financial performance of S&P/TSX companies. Our results show that regulatory compliance alone does not significantly impact on financial performance, political connections alone have a positive and very significant effect, and both factors combined have a more positive and significant impact than they have individually. We conclude that the analysis confirms our research hypotheses.

Further to the various scandals that shook North-American markets in the early 2000s, Canada reacted in 2004 and 2005 by changing its regulations on the governance practices of listed companies. Faccio (2006) and other authors have argued that politically connected companies can have less regulatory oversight than unconnected firms. This affirmation raises an issue that this article attempts to solve, i.e., whether politically connected Canadian companies are less compliant with regulatory requirements on governance than unconnected firms, and with board of directors requirements in particular. Although politically connected and unconnected firms differ significantly in their compliance with regulation, the analyses show that the state of being politically connected tends to have little bearing on regulatory compliance.

Despite numerous studies, there is still no consensus about the impact of the board on firm performance. Previous research has focused mainly on the economic and financial aspects of the director's role, but scant attention has been paid to its relational aspect. Some authors have suggested that directors' social networks (connections) could be used to help the firm acquire external resources. This paper delves into the impact of three types of director connections on the firm's resources and financial performance. Based on a random sample of Canadian firms, our results show that directors' economic and political connections have a positive and significant impact on firm debt and that each type of connection they have (economic, political and social) affects firm financial performance.