S&P/TSX 300 Companies’ Political Connections, Compliance with Board of Directors Regulations and Financial Performance

Abstract

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.

The Impact of Political Connections on the Performance and Solvency of Canadian Financial Institutions

“…ROA, ROE and solvency were negatively influenced by political connections. These results partially confirmed our hypothesis and partially supported previous findings related to companies in other industries, which have shown that political connections have a positive effect on financial performance (Dicko & Breton, 2013a;Dicko & El Ibrami, 2013;Dicko & Khemakhem, 2015). …”

“…8, No. 11;2016 In Canada, Dicko, and Breton (2013a) and Dicko and Khemakhem (2015) showed that politically connected Canadian companies performed better financially than non-politically connected companies. Their performance was measured using return on assets and return on equity ratios.…”

“…Research has demonstrated that companies with political connections perform better financially and have easier access to finances, in both the Canadian context (Dicko & Breton, 2013a;2013b;Dicko & El Ibrami, 2013;Dicko & Khemakhem, 2015;Khemakhem & Dicko, 2013) and around the world (Hillman, Zardkoohi, & Bierman, 1999;Goldman, Rocholl, & So, 2009;Fisman, 2001;Hillman, 2005;Goldman, Rocholl, & So, 2013;Li & Xia, 2013;Houston, Jiang, & Yuema, 2014;Yan, Wu, & Wilson, 2014). Until now, almost no studies have been conducted on financial institutions.…”

Firms Political Connections and Winning Government Contracts

“…In the Canadian context, Dicko and Khemakhem (2015) showed that politically connected S&P/TSX firms performed better financially (measured by return on assets and return on equity) than non-politically connected firms. Dinc (2005) investigated the influence of politics on government-owned banks in 43 countries (excluding the United States), finding that, relative to private banks, these banks increased their lending in election years.…”

“…Since certain regulations in the US (e.g. on corporate governance) are more stringent than in Canada, Canadian companies behave differently when listed on US financial markets (Khemakhem & Dicko, 2013;Dicko & Khemakhem, 2015). We therefore decided to include this variable in our study, using a dummy variable valued at 1 if the company is listed on US markets and 0 otherwise.…”