The Cost of Political Uncertainty On The Firm Performance of Pakistan

European Journal of Accounting, Finance and Investment
Vol. 6, No. 2; February-2020;

ISSN (3466 – 7037);
p –ISSN 4242 – 405X
Impact factor: 5.02
THE COST OF POLITICAL UNCERTAINTY ON THE FIRM

PERFORMANCE OF PAKISTAN
Rabia Najaf
Taylor’s business school
Abstract: Corporations faced various types of uncertainties in the business world and connected firms are a
speculative tool to mount the progress of firms and overcome such types of uncertainties. These corporations can gain
more financial resources to escalate the corporate performance. The inter-governmental relationship between
corporations and government is the channel by which firms can access influence to overcome the market. According
to the resource dependency theory, external resources ultimately boost firm performance. As well as, government link
associations are known as a financial hub of all the markets and enhance the performance. But in Pakistan political
uncertainty has a significant negative impact on the firm performance. The main objective of this research is to
explore that political due to political uncertainty is an obstacle for future investment. This study tries to show that
political uncertainty declines the position of Pakistani stock exchange. We shall use secondary data to test the political
uncertainty impact on firm performance.
Keywords: mount, uncertainties, financial resources, inter-governmental relationship.
Introduction useful policies in favour of their enterprises. There is

Extensive empirical research investigated that political the glimmer of hope that in futures these connections
connections have a mixed influence on firm efficiency. will work more efficient way. So, all these evidence
In the global world, due to a slump, these firms are prove that political aliens are beneficial for the
inefficient. So, these firms provide incentives for better stabilization of firms.
performance. Among the various firms, these firms are Robust of studies shows that political uncertainty is
lastly availed by their sources. There are myriad ways considered as the crucial factor that affects the
to enhance the efficiency of the firms with the help of corporation performance and risk. There are numerous
diligences, proper planning, and strong market share of studies that prove that in USA, political uncertainty
but political connections are known as the more has significant negative impact on the firm
efficient way to promote the efficiency of firms. Most performance. Recently, it proves that political
of the studies exhibit that political members turnover uncertainty has strong effect on the stock market
hurt the efficiency of firms. According to various volatility. Similarly, changes in government policy have
studies political connections have both positive and induced negative impact on the firm performance.
negative impact on corporate performance and However, firm performance start decline due to
efficiency. Most of the studies exhibit that the election. The main objective of this paper is to explore
cultivation of these connections is pervasive due to impact of political uncertainty on the firm performance.
these powers. These firms generate beneficial resources This study is helpful to extend the literature that
based on their powers. Political aliens make more political uncertainty has significant impact on firm

An official Publication of Center for International Research Development
Double Blind Peer and Editorial Review International Referred Journal; Globally index
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ISSN (3466 – 7037);
p –ISSN 4242 – 405X
Impact factor: 5.02
efficiency and performance as well. Second, Pakistan is However, it is an effective way to improve the
under developing country therefore these corporations performance of firms (McMillan, 1995).
are more prominent. However, corporation performance Political Connections and Firm Performance
is unequivocally associated with government turnover Most of the studies exhibit that government link boards
and their policies. Therefore, top political members can are known as more efficient for the better performance
implement policy according to their favours. Hence, of firms. According to resource dependency theory, the
termination of politician has impact on the economic presence of such boards is known as a significant
reforms. As the result, of instability corporation face the impact on the firm success (Haniffa and Hudaib, 2006;
inevitably increase the operating risk. Hillman, 2005; Hillman et al., 2009). For economic
Political Connections and Firm Efficiency globalization, enterprises are mostly involved to
Politically connected firms exert the negative impact on conduct political connections. Political connections are
operational efficiency because they incur a large known as the panacea of all difficult situations. It is
amount of labour cost as compared to other firms. Due known as a better source of a hefty investment. These
to political instability, there are more chances of errors are ultimately involved to mount the financial strength.
in calculations therefore; these connections hurt the In the business world, it is the best way to attract angel
firm efficiency. Political connections do not use firms investors. These are beneficial to escalate all the
for their political goals. Most of the studies examine capabilities of corporations. There is rudimentary
that strength of political members has influenced the evidence proves that political connections have a
firm operational efficiency. Political allies are more crucial role in surging the growth of firms. It is known
confidence regarding take the decision about firms as the speculative tool to escalate the upswing of the
rather than other firms. They can take resources performance. In the business world, political allies are
allocation decision in a very smooth way. It has a known as key players to enhance the smooth
positive impact on the efficiency of firms. Multiple development of corporations.
political connections hurt corporate performance. Most of the studies examine that these connections
Often, these connections give the indicator of financial provide benefit to firms in the capital market. These are
fragility. They produce products on the desire of more beneficial to raise funds outside the country. So, it
politician, not based on customers' desires. Therefore, it is a more efficient way to enhance the performance of
has the worst influence on the growth of firms. All firms. These firms can gain loans in the long run with
these evidences show that it hurts the performance of minor collateral and also beneficial for hefty
firms. investment. Therefore, these associations are more
According to the resource dependency theory, there is a beneficial for the development of enterprise. All these
positive association between political connections and evidence prove that for the economic globalization,
corporate performance. According to this theory, these enterprises are involved in conducting political
firms have competitive advantages rather than other connections. Conflicts of interest have a negative
firms. These firms provide both tangible and intangible impact on corporate governance. The reason is that
resources as compared to other firms. Prior studies have political firms have weak corporate governance due to
proved that managers of such types of firms provide the political instability.
key sources and government support to their firms that Stakeholder Theory and Political Connections
are the best way to enhance the performance of firms Stakeholder theory defines as that group and different
(Wu, W.,etal., 2012). Mostly, private firms like the individuals who work for getting the objective of the
government managers to boost the performance of firm as known as a stakeholder of the company. In
firms especially, that firms which need property right. different views in stakeholder theory, there is a network

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p –ISSN 4242 – 405X
Impact factor: 5.02
of associations of people who work together to achieve significant impact on firm’s performance. They provide
their corporation's goal. In stakeholder theory, there are sources to firms for better performance. They examine
includes some other parties like employees, government that shareholder theory base on this concept that to
bodies, trade unions, and political groups. Most of the enhance the value of corporation (Ma Katiuska Cab et
times competitors are also considered stakeholder of the al., 2014).these are a myriad way to enhance the capital
organization (Wheeler et al., 2002). Stakeholder theory of firms. Different stakeholder provides capital for
is mixtures of sociological as well as organizations maximizing the firm s performance (Blanca Arosa et
disciplines. In stakeholder theory managers also work al., 2013). Political allies as stakeholder lead to high
for organization unlike agency (Freeman, 1984). performance rather than others due to their market
Stakeholder theory defines as that group and different power and resources (Isabel María et al., 2014).
individuals who work for getting the objective of the To summarize, politically connected boards provide the
firm as known as a stakeholder of the company. In benefit to the corporation in the shapes of donation and
different views in stakeholder theory, there is a network in the shape of corporate social reasonability. So, these
of associations of people who work together to achieve connections have a positive impact on the performance
their corporation's goal. In stakeholder theory, there are of firms. On the other hands, two different political
includes some other parties like employees, government party members have a negative impact on the
bodies, trade unions and political groups. Most of the performance of firms. Finally, political instability has
times competitors are also considered stakeholder of negative impact on firm performance.
organization (Wheeler et al., 2002). Stakeholder theory Stewardship Theory and Political Connections
is mixtures of sociological as well as organizations The main objective of steward to enhance the wealth of
disciplines. In stakeholder theory managers also work shareholders through boost the performance of firms.
for organization unlike agency (Freeman, 1984). On the basis of this theory, stewards are known as
Associations with different networks have an influence organization s manager and execute that work for
on decision making and it has also impact on output and increasing the wealth of shareholders. Like agency
outcome of firms. Basically, this theory is based on the theory, this did not focus on the concept of
organization management (Preston, 1993). This theory individualism. Here, top managers of organization can
is based on managerial decision making and integrate the objectives of the corporation. This theory
shareholders have found intrinsic value. Shareholders suggested that after the success of organization steward
of the corporation are significant for all sort of decision are motived. According to stewardship the main
and they have their own power in an organization objective of CEO and managers of the corporate to
(Clarkson, 1995). The main objective of shareholders to work for the benefit of their principle. This theory is the
enhance the wealth of firms. According to stakeholder basis on this assumption that there is a strong
theory clients, suppliers and customers are having some association between organizational achievement and
portion of a stake in the corporations. They have an satisfaction of owner of a corporation (Donaldson &
impact on upswing and failure of the corporation. Davis, 1989; 1991; Davis, Schoorman & Donaldson,
Therefore, it is the obligation of the manager that to 1997). Employee as the economy being while
make sure that all the stakeholders of the corporation stewardship is the basis of trust. However, this theory
have taken the fair return from the business (Donaldson base concept that steward empower the base of trust
& Preston, 1995). Stakeholder theory also advocates and offer them maximum autonomy.
that corporate social responsibility is also a way to
which stakeholders are conducting with corporations.
Political members as a stakeholder of firms have a

pg. 3
ISSN (3466 – 7037);
p –ISSN 4242 – 405X
Impact factor: 5.02
It is useful to minimize the cost of monitoring (Agyris, different shapes provide a source to their firms like
1973). Managers of firms can return finance to their market information, supplier’s social groups and
investors for the better reputation and they can re-enter various policy makers (Johnson et al., 1996)
the for the purpose of future finance. Moreover, Politically connected boards are single way to enhance
stewardship theory is based on the stewards are known the performance of firms. They provide sources,
as safeguards for the purpose of the can increase the finance from the external sources and promote the
wealth of shareholders (Shleifer and Vishny progress of firms (Goldman et al., 2009). Most studies
1997).Most of the studies prove that politician as argue that it is a better way of financing (Mian and
steward of a corporation can get more profit as Khwaja, 2004). Politically connected boards have
compared to non-political firms (J. Jay Choi et al., better performance rather than other. Appointments of
2016). According to conjunctions of different studies, political allies give higher stock prices. To summarize,
political members as steward of firms can work a better political connected boards are known as substantial
and they can take the better financial decision elements for generating resources. In depth analysis, it
(Bebchuk, Fried, and Walker, 2002; Grabke-Rundell is the speculative tool to boost the progree of firms.
and Gomez-Mejia, 2002). Politically connected firms These members have main role for nurturing the
have more market capitalization as compared to other corporations. Such sort of peers do not face the capital
firms. The reason is that political members can take security due to their links.
they have more market information and can take the Considering the positive impact of political connections
decision on their behalf (Chow, 1992). Therefore, on the corporation's efficiency, there are found enough
political instability induce negative impact on the firm evidence. A core argument is that political connections
performance. provide adequate resources to the corporation to
Resource Dependency Theory and Political enhance their performance. Theory suggests that
Connections valuable resources are beneficial to kill competitive that
Resource dependency theory focuses on the different can be translated into superior growth. Indeed, the
roles of boards for the providing the resources. This establishment of political connections is extremely
theory is based on the concept that for the superior valuable for the corporation because they are share
growth there is a need for external resources. markets anticipate. Also, these associations mitigate
Resources can be generated on the basis of external financial risk and provide exclusive opportunity to
environments. For the resources can also be generated boost the performance.
on the basis of power. There are direct associations Conclusion
between power and resources (Pfeffer and Salancik Corporate political connections have a crucial role in
1978). Resource dependency theory is based on the the world's largest and more important economies.
concept that directors have a crucial role to assess the Most of the times ailing company needs such types of
resources for their firms to (Canella and Paetzold resources for better achievements. Links with the
2000). government leaders to the high profitability of
This theory is a base concept that new representatives corporations. Indeed, these are channels to upbeat the
mean to provide a source to your corporation for their market value of the firms. For better improvement,
success.in this way, investors mostly do hefty there is a need for high growth momentum. The main
investment. While most of the studies prove that trajectory of such types of corporations to enhance the
provision of resources is the mere channel through profit. There is vindicating evidence which proves that
which corporation can escalate the performance of these associations ultimately produce the bulk of
firms. Most studies have shown that directors in the resources and beneficial in the period of financial

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ISSN (3466 – 7037);
p –ISSN 4242 – 405X
Impact factor: 5.02
calamity. They have the market decision newbies Wheeler, D., Colbert, B. and Freeman, R.E. (2003)
cannot take any stunning decision regarding the firm's “Focusing On Value: Reconciling Corporate
performance. Most of the studies inaugurated that such Social Responsibility, Sustanibility And A
Stakeholder Approach In A Network World”.
corporations are essential for firms to save them from
Journal of General Management, Vol. 28, pp.
the conditions of jeopardize. Based on the resources 1-28
dependency theory, there is more imbalance of power
means economic disruption. For economic Freeman, R. E. (1984) “Strategic Management: A
globalization, enterprises are mostly involved to Stakeholder Approach”. Pitman, London
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Clarkson M. B. [1995], “A Stakeholder Framework for
type of risk which is associated with financing like
Analysing and Evaluating Corporate Social
financial transactions that include company loans. All Performance”, Academy of Management
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The Cost of Political Uncertainty On The Firm Performance of Pakistan

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European Journal of Accounting, Finance and Investment

Vol. 6, No. 2; February-2020;