The culture of political connections, financing constraints, and performance: firm-level evidence from Pakistan

This article examines how firm political connections affect the financing constraints of Pakistani firms, and how these are related to firm performance. Using panel data for the listed, non-financial, Pakistani firms, over the 2007–15 period, our empirical analysis shows that in Pakistan formal political connections affect significantly firm financial status: politically connected firms are less financially constrained. The results are consistent across various measures of financial status. We find, however, evidence that politically connected firms perform worse than unconnected firms. The results are robust to three different measures of firm performance. We also find some evidence that the effects of political connections on firm performance vary across groups of Pakistani firms by the level of financing constraint. Our results suggest financial resource misallocation in Pakistan consistent with the soft-budget constraint theory.