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The impact of political connection and risk committee on corporate financial

performance: evidence from financial firms in Malaysia
Article in Corporate Governance International Journal of Business in Society · October 2020

DOI: 10.1108/CG-04-2020-0122
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The impact of political connection and
risk committee on corporate financial
performance: evidence from financial
firms in Malaysia
Redhwan Aldhamari, Mohamad Naimi Mohamad Nor, Mourad Boudiab and
Abdulsalam Mas’ud
Abstract Redhwan Aldhamari,

Purpose – This study aims to examine the association between the effectiveness of risk committee (RC) Mohamad Naimi Mohamad
and firms’ performance in Malaysian context. It also explores whether political connection has an impact Nor and Mourad Boudiab
on the relationship. are all based at the Tunku
Design/methodology/approach – This study, using a principle components analysis, derives a factor Puteri Intan Safinaz School
score for RC attributes to proxy the effectiveness of RC. It also uses both accounting and market of Accountancy, Universiti
performance to measure the company performance. Utara Malaysia, Sintok,
Findings – Using a sample of financial firms from 2004 to 2018, this study finds that both accounting Malaysia.
and market performance are higher for firms with an effective RC. It also finds that the effectiveness Abdulsalam Mas’ud is
of RC in monitoring and management of risks is more pronounced for politically connected firms based at the Department of
(PCFs). In further tests, the paper finds that RC attributes (i.e. RC independence, qualification and Taxation, Federal University
gender) are positively and significantly associated with accounting performance, while those of RC Dutse, Dutse, Nigeria.
existence and overlap are positively and significantly related to market performance. The study also
finds that RC size (RC diligence) has a positive (negative) impact on financial firms accounting and
market performance. The further analysis also shows that PCFs with a separate as well as larger RCs
experience both higher accounting and market performance. This study’s results are robust for
concerns of endogeneity.
Practical implications – The findings of this study resolve the ongoing debates surrounding political
connection by suggesting financial firms not to have politically connected board members as doing so
may deteriorate their performance. This study’s results are also useful for investors, regulators and
policymakers.
Originality/value – To the best of the authors’ knowledge, this study, for the first time, introduces on the
interaction term between the effectiveness of RCs and political connection to empirically explore how an
JEL classification – M41, G21,
effective RC may reduce the potential risk of political ties. As such, this study adds to the literature and
G28, G32, G34
sheds light on an aspect of risk (i.e. risk stems from establishing close link with the government) that is
growing in importance.
Received 3 April 2020
Keywords Political connection, Corporate performance, Financial institutions, Risk committee Revised 3 June 2020
Paper type Research paper 6 August 2020
Accepted 13 August 2020
The authors wish to thank

1. Introduction Hamid Al-Wesabi for his
valuable suggestion in the
analysis process and the
The financial crisis, along with unexpected corporate failures and scandals, such as Enron, anonymous reviewers of this
WorldCom, Parmalat, Bear Stearns, Citigroup, Lehman Brothers and Dexia in the West, and paper. The authors report no
conflicts of interest and they
Transmile, Megan Media and Oilcorp in Malaysia, has raised awareness on the importance take responsibility for any errors
of corporate governance mechanisms to monitor various types of risks (e.g. credit risk, contained in this paper.
DOI 10.1108/CG-04-2020-0122 © Emerald Publishing Limited, ISSN 1472-0701 j CORPORATE GOVERNANCE j

liquidity risk, information risk and principle risk) for financial institutions. Although there are
many factors that may have contributed to these financial crisis and corporate disasters, the
poor monitoring of risks which enabled the management to take excessive risk was a major
cause for these fragilities (Raber, 2003; Yeh et al., 2011; Battaglia et al., 2014).
Traditionally, risk management functions have been the responsibility of the audit committee
in most countries including Malaysia. However, the trust placed on the audit committee in
assessing risk-related activities and financial reporting is somehow challenged by
corporate collapses globally. The risks associated with company operations are wide,
comprising both financial and non-financial risks, which technically go beyond the scope of
an audit committee (Ng et al., 2013). Literature concludes that a traditional audit committee
is not adequate for overseeing and monitoring financial as well as non-financial risk in today
complex and high-risk environment (Brown et al., 2009; Yatim, 2010; Kallamu, 2015).
Moreover, the increase in the responsibilities imposed on the audit committee and the lack
of resources such as time and expertise required to provide effective oversight of
organisational risk management strategies have emphasised the need to establish a
separate risk committee (RC).
It has been suggested that the establishment of an RC will assist organisations in achieving
their objectives and secure the organisational reputation as well as provide improved
quality financial reporting. Moreover, according to the agency theory, the RC plays
important role in mitigating the conflict of interest between the shareholders and managers,
which may lead to enhanced shareholder value and firm performance. The extant literature
reports that an RC can ensure that managers do not avoid profitable but risky projects
which may reduce operational risk and ultimately enhance performance (Elamer and
Benyazid, 2018). As such, based on the agency theory, it is plausible to expect that
financial performance is improved in the presence of an effective RC that reduces
information asymmetry and operational as well as information risks.
There are two competing arguments as to the beneficial vs the detrimental role of political
connection. These arguments suggest that there may be countervailing effects of political
connection in accentuating or attenuating financial performance. Resource-based and
helping hand theory suggest that political connection facilities the chance for a firm to
generate benefits that are more likely to improve the performance of the firm. This is on the
fact that firms are priori likely to link themselves to the government or politicians as such
linkage provides economic benefits such as securing government contracts, government
bailouts, tax waivers, market power and government subsidies. Su and Fung (2013) argue
that cultivating political connections help firms to increase their sales and to incur lower
operation and financing cost, which may reflect favourably on the firms’ performance. A
review of literature indicates that politically connected firms (PCFs) experience high
financial performance (Niessen and Ruenzi, 2010; Wu et al., 2012; Ding et al., 2014; Zhang
et al., 2014; Li et al., 2016; Wang et al., 2019). In line with this argument, one may expect
that an RC as a channel to improve a firm performance may be diluted in the presence of
political ties and, thus, the RC–performance association is weakened for PCFs.
On the other hand, establishing close ties with the government may not always be beneficial
to a firm because, as argued by the agency theory, government officials seek different
objectives that may go against value-maximizing objectives. For example, government
officials may use firms’ resources to benefit their cronies and supports, who in return
provide votes, political contributions and bribes (La Porta et al., 2002; Bushman et al.,
2004). Squandering the firm’ resources in non-value maximizing activities may eventually
affect the company performance adversely. Moreover, grabbing hand theory alleges that
political connection may entrench the resource of the firm through systematic favours of
directors which may have the serious consequence of firm value. Extant literature shows
that PCFs are riskier, have poor governance practice and lower financial performance than
non-political affiliated firms (Fan et al., 2007; Asquer and Calderoni, 2011; Cao et al., 2011;
j CORPORATE GOVERNANCE j
Sheng et al., 2011; Saeed et al., 2016; Chong et al., 2018). From the standpoint of the
agency and grabbing hand theory, we expect that an effective RC plays a dominant role in
improving financial performance of PCFs and, thus, the RC–performance relationship is
improved for PCFs.
Our study builds on two important research streams. The first focuses on the impact of RCs
on financial performance (Yeh et al., 2011; Aebi et al., 2012; Ames et al., 2018; Elamer and
Benyazid, 2018). The second is the research examining whether political connection is
beneficial or detrimental for performance (Boubakri et al., 2008; Faccio, 2010; Ding et al.,
2014; Zhang et al., 2014; Saeed et al., 2016; Wang et al., 2019). Therefore, the purpose of
the current study is to examine the possible association between RC effectiveness and
performance of Malaysian financial firms during the years 2004–2018. It also seeks to
explore the possible impact of political connection on the relationship. The emphasis on
financial firms is justified on the basis that financial sector in Malaysia contributes
significantly to the GDP which is the second highest after manufacturing, trade and service
sector and there is significant investment of the government in the sector (Kallamu, 2015).
Furthermore, the financial crisis has highlighted the importance of risk management,
particularly in reducing the excessive risk behaviour of financial firms (Yeh et al., 2011;
Orazalin and Mahmood, 2019). Ames et al. (2018) argue that focusing on a single industry
provides for higher internal validity by eliminating cross-industry variation. The recent
emphasis of regulatory bodies on strengthening risk reporting system of financial firms and
the increasing trend of firms to form a stand-alone RC make our study worthwhile and
timely. Additionally, questions on risk identification, evaluation, management and control
have emerged as hot and frequent debates in the boardroom to protect shareholders’
interests and look after company assets.
Several important features make Malaysia a unique and interesting environment for
empirically exploring the impact of RC effectiveness, RC characteristics and political
connection in relation to firms’ financial performance. Firstly, in the wake of Asian financial
crisis, there were many controversies surrounding how boards at financial firms should
monitor and manage risks. In respond to these concerns, the central bank of Malaysia
mandated finance firms to have a separate RC starting from 2003. Secondly, Malaysia is
identified as a country where the corporate sector is dominated by firms associated with
such political connections (Gul, 2006). The international study of Faccio (2006) reports that
among the listed companies in different countries, Malaysia has the largest percentage of
PCFs. Moreover, anecdotal examples of political extraction in Malaysia can be found in,
among others, Gomez et al. (1999), Gomez (2003), Johnson and Mitton (2003), Fraser et al.
(2006) and Bliss and Gul (2012). Thirdly, most firms in Malaysia are owned by a small group
of investors who usually involve in firms management. Studies reveal that more than 50% of
Malaysian firms’ shares are owned by individuals and family members (Thillainathan, 1999;
Cheung and Chan, 2004). The existence of such concentrated ownership along with weak
institutional environment and poor legal enforcement may cast doubt on the effectiveness of
RCs and whether board-level RCs are viewed as panacea for risk monitoring and
management which can actually improve performance.
We expect this study to contribute to corporate governance and firm performance literature
in the following ways. Firstly, there are burgeoning studies that examined the impact of RCs
on firm performance. However, the impact of political connection on RC–performance
association remains silent. To the best of our knowledge, this study, for the first time,
introduces on the interaction term between the effectiveness of RCs and political
connection to empirically explore how an effective RC may reduce the potential risk of
political ties. As such, this study adds to the literature and sheds light on an aspect of risk
(i.e. risk stems from establishing close link with the government) that is growing in
importance. Secondly, generally, studies on corporate governance conclude that firms with
effective RCs experience high financial performance. Nonetheless, these studies failed to
explain through which channel financial performance of the firms is improved. Our study
suggests that an effective RC may enhance firms’ financial performance through mitigating
operational and information risks of political connections that may deteriorate performance.
Thirdly, prior studies have heavily examined the influence of political connection on
performance of non-financial firms, with little attention to financial sector. Therefore, this
paper contributes to the prior studies by examining the benefits, or lack thereof, political
links can bring to firms operating in regulated industries. Our results suggest that political
connection of board members is detrimental for financial companies because such
companies have a direct link with government through government ownership which is
considered more stable than board members who have personal links with politicians. We
believe that the results can provide insight to understanding the potential impact of political
connection on performance of high regulated firms in emerging markets. Fourthly, most RC
studies consider either the existence or very few characterises of RC to examine their
relationship with firm value and performance. The current study looks at wide range of RC
attributes (e.g. existence, independency, qualification, size, diligence, overlapping and
gender) to explore their effect on corporate performance. Finally, despite the importance of
managing and monitoring risks listed companies face in regaining investors’ confidence
towards stock markets and enhancing the companies’ value, relative to developed nations,
there has been comparatively little research on this issue from a developing country’s
perspective. Therefore, we draw our data from Malaysia, which is an emerging economy
and has different institutional characteristics.
2. Literature review and hypotheses development

2.1 Risk committee effectiveness and corporate financial performance
Studies in board of director sub-committee, generally, argue that a measurement of
committee effectiveness should constitute more than one characteristic of the committee
itself. The use of just one feature of the committee cannot provide a comprehensive picture
of the effectiveness of a committee as these features complement each other. By ignoring
one of the components of this committee, it may cause the committee to fail to perform its
duties properly and the committee might become ineffective (Garcı́a Lara et al., 2007; Naimi
et al., 2010; Connelly et al., 2012; Bhatt and Bhatt, 2017).
For example, committee diligent (i.e. frequency of meetings) alone does not contribute to
the improvement of the company’s performance if it does not have appropriate composition
(i.e. independent members). Similarly, studies in audit committee also suggest the use of
the composite index to evaluate the effectiveness of the committee (Lisic, 2014; Al-Dhamari
et al., 2018).
Working in the same line of arguments, we expect the effectiveness of RC (i.e. captured by
RC index/score) can help improve company performance. Based on our expectation, the
following hypothesis is developed:
H1. There is a positive relationship between the effectiveness of an RC and firm
performance.
2.2 Risk committee attributes and corporate financial performance
2.2.1 Existence of the risk committee and corporate financial performance. The formation of
an RC is highly recommended by Securities Commission of Malaysia through Malaysian
Corporate Governance Code (MCGC). In a similar vein, the Bursa Malaysia through its
listing requirements also requires the companies to disclose a statement about risk
management and internal control affairs of the company. The need for a stand-alone RC
has been clearly spell out in the revised code of corporate governance 2017, where large
companies are required to establish an RC that is accountable to oversee the risk
management policies and procedures. It should be noted, however, that it would be a good
practice for the company to separate this committee from the audit committee as they have
different functions and roles within the company. In fact, according to the MCGC, the board
of directors, which is the highest authority in corporate structure, should fully be
accountable of risk management activities in the organisation. As such, it is the duty of
board of directors to initiate and/or to form a separate committee that solely focuses on
managing risks in their organisation. The creation of this committee enables the company to
identify the level of risk tolerance and identify and evaluate key risk factors so as to protect
company’s shareholders. In addition, it is contended that the establishment of the stand-
alone committee will make the risk assessment process more effective and reduce financial
risk (e.g. prevention of financial crime) (Abdullah and Said, 2019). The existence of the RC
is expected to positively contribute to the process of risk mitigation and, as a result, improve
finance company’s performance (Minton et al., 2014; Halim et al., 2017; Ames et al., 2018).
Based on the above discussion, this study postulates that:
H1a. There is a positive relationship between the existence of the RC and firm
performance.
2.2.2 Independence of the risk committee and corporate financial performance. The
inclusion of an independent director in the RC is an important factor that determines the
objectivity of this committee. Paragraph 9.3 of the MCGC 2017 states that majority of the RC
members should be independent directors (Securities Commission, 2017).
Apart from the objectivity, the independent directors strive to maintain their reputation and
image (Fama and Jensen, 1983; Hermalin and Weisbach, 1991). The inclusion of
independent directors in the RC is a strategic move by the company as these directors are
concerned of their reputation and they try to avoid any risk that might affect company’s
performance. These directors are ready to contribute ideas on how a risk can be managed
as they do not have any significant interest in the company. In addition, director
independence is an important mechanism in the effective governance system for
monitoring risk management processes.
By emphasizing on the aspects of reputation protection and being objective, the value and
contribution brought by independent directors towards managing risk is valuable. This
connotation is consistent with the argument that an RC with independent directors is able to
determine risk for financial institution at reasonable rate (Elamer and Benyazid, 2018) and is
more likely to positively affect the company’s performance (Yeh et al., 2011; Kallamu, 2015;
Kakanda et al., 2018). Based on the above discussion, the following hypothesis is stated:
H1b. There is a positive relationship between the proportion of independent directors on
the RC and firm performance.
2.2.3 Size of the risk committee and corporate financial performance. As has been stated
earlier, according to MCGC 2017, majority of RC members should be independent
directors. While the issue of who should be appointed in the RC and his roles are straight
forward, another complex issue is how many members or what is the appropriate size of the
RC. Issues pertaining to membership size, unfortunately, are not mentioned in both the
MCGC and the Listing Requirements. In the case of audit committee size, all of their
members must be independent and at least three members should be appointed
(Securities Commission, 2017). Literature on the size of the RC indicates that there is
inconsistent conclusion on the impact of RC size on company’s performance; where in
some cases the size has a positive effect (Tao and Hutchinson, 2013; Abubakar et al., 2018;
Al Matari and Mgammal, 2020) but other studies find the opposite (Kallamu et al., 2013;
Battaglia et al., 2014; Elamer and Benyazid, 2018; Kakanda et al., 2018). This raises
question whether small or large RCs are effective governance mechanism.
The proponents of small size of the RC argue that small RCs make the decision-making
process easier, faster and more effective (Ng et al., 2013; Battaglia et al., 2014). In fact, the
function of the committee will be more focused without interfering with issues that are not
directly related with risk management aspects. On the other hand, advocators of big size of
the RC opine that in the presence of more members, different views can be heard (Bédard
et al., 2004). Therefore, the decision made will be more inclusive and refined. Various ideas,
suggestions and recommendations on how the company should manage the risk will be
discussed and the results of the discussion will be more conclusive. Given the two
opposing views discussed above, the following non-directional hypothesis is developed:
H1c. There is a relationship between the size of the RC and firm performance.
2.2.4 Diligence of the risk committee and corporate financial performance. According to
the agency theory, conflicts between principals and agents can be resolved through
frequent meetings of the RC. It is argued that the more meetings an RC conducts among its
members, the greater the communication process between the parties involved in risk
management. In addition, high number of meetings would enable the key issues in
risk management functions, such as risk appetite, risk avoidance and risk awareness to be
discussed in depth. Hence, the frequency of the meetings indicates the RC diligence
(Cheung et al., 2010; Battaglia et al., 2014).
However, there are two different perspectives in explaining the relationship between
meeting frequency of the RC and company performance. The first perspective argues that
the high frequency is an indicator of the committee members’ commitment
and attentiveness in handling the assigned tasks (Abdul Rahman and Haneem Mohamed
Ali, 2006). Moreover, the frequency of meetings held will allow for a variety of thoughts to be
discussed in an effort to strengthen internal control of the company. Accordingly, the RC is
priori likely to put the agenda to minimise company’s risk as their main priority and the
importance of risk management matters will be seriously discussed. This, eventually, will
lead to enhanced company’s performance. Battaglia et al. (2014) and Kakanda et al. (2018)
empirically report that financial institutions with high number of RC meetings experience
higher market performance.
On the other hand, high number of meetings could be a signal that there are some
problems that companies need to address. These concerns are closely linked to the current
threat of risks faced by the company and it requires full attention of the members of the RC.
Literature suggests that the company that meets more often is actually a high-risk company
with lower financial performance (Ng et al., 2013; Elamer and Benyazid, 2018). Based on
these competing arguments, the following non-directional hypothesis is presented:
H1d. There is a relationship between diligence of the RC and firm performance.
2.2.5 Qualification of the risk committee and corporate financial performance. In addition to
the factors listed above, the credibility of a director is also an important factor in ensuring
that board committees are functioning effectively. One of the indicators of director’s
credibility is director’s qualification and investors are attracted to companies with a high
number of qualified and educated directors. In the case of RCs, directors equipped with
appropriate qualification are able to understand and manage the challenges faced by the
company.
This is consistent with the suggestion made by MCGC 2017 which states that “Risk
management focuses on identifying threats and opportunities while internal control helps
counter threats and takes advantage of opportunities”. As the job scope of the RC also
covers internal control and governance aspects, a very competent and capable individual
is needed to be selected.
Dionne et al. (2013) and Al-Hadi et al. (2016) suggest that qualified directors can contribute
and add value to the company by alleviating business uncertainties and take prudent
actions in managing company’s problems. While the business rules and regulations in
Malaysia did not specifically state the level qualification, it is understandable that the
appointment criteria for an RC must incorporate the level of education or experience which
can be a basis for determining whether a person is eligible to be appointed to the RC or not.
Further, the complexity of finance-related companies requires someone who is not only an
expert in finance area but also other non-financial areas such as accounting and strategic
management. With such knowledge, the RC will be more able to identify risks and
determine suitable risk management strategies. Al-Hadi et al. (2016) provide empirical
evidence that RCs with qualified directors are more likely to mitigate risk market disclosure.
According to the agency theory, qualified directors are able to safeguard the interests of the
company, especially in enhancing the level of transparency and protect the shareholders’
right. Moreover, qualified directors will ensure that the company is not exposed to
unreasonable business risks and adheres to good risk management practices. Adherence
to best risk management practices is expected to reduce business risk and have a positive
impact on the company’s performance. Based on the agency theory and literature
reviewed, this study formulates the following hypothesis:
H1e. There is a positive relationship between the qualification of the RC and firm
performance.
2.2.6 Overlap of the risk committee and corporate financial performance. The functions of
the board are too large and burdensome. To reduce the risk, some of its duties will be run
by a number of committees appointed from the board. By assigning some of the board’s
functions to these sub-committees, the governance process can work better and reduce
the likelihood of inactive members (Spira and Bender, 2004; Laux and Laux, 2009). Among
the common types of committees that have been established within a company are risk
management, audit and remuneration committees (Habib and Bhuiyan, 2016). Although the
functions of audit, remuneration and risk management committees are different, they are
related to each other.
The remuneration committee works to develop formulas and determine how well board of
directors or top management should be paid and monitor their performance. According to
the agency theory, by giving top management incentives, conflicts between owners and
managers can be resolved. The incentives are often associated with accounting
measurement performance. Therefore, companies may use performance-based
compensation contracts to motivate their employees to work hard to meet the company’s
goals.
However, there is a possibility for company executives to engage in high risky projects to
increase their incentives and use accounting manipulation techniques to justify high
rewards in the case of low business performance. Therefore, it is important that the audit
committee function as a check and balance element to ensure that accounting manipulation
can be avoided. In addition, the RC will ensure that the level of risk is within acceptable
range or consistent with risk management framework. The RC is responsible for assessing
and recommending to the company how the risks (financial and non-financial risks) can be
avoided and to minimise its impact through various strategies such as risk avoidance and
risk elimination. In fact, the function of the RC is closely related with audit committee, where
according to MCGC 2017, the company should have effective internal control system and
the system should be able to manage the risks.
There are two views on the effect of committee overlap towards risk and performance. The
first view states that the overlapping committee would mitigate potential risks and thus
improve the company’s performance whereas the second view suggests the opposite.
Hermanson et al. (2012) allege that coordination between the committees would enable
these committees to have better understanding on each other’s duties and appreciate the
risk implications of each committee. Accordingly, the compensation committee will
formulate a remuneration plan that will not violate accounting rules and standards.
Meanwhile, audit committee will monitor and offer suggestion if the planned remuneration
package would create a risk of misstatement of the financial statements. As for the RC, it will
assess how risks will impact financial performance of the business in the future. Therefore,
audit committee can act as a monitoring tool to ensure accounting practices are complied,
meanwhile, risk management committee will determine the effect of financial risk towards
business operation. Hines et al. (2015) suggest that companies with overlapping directors
report accounting information with higher quality and, thus, bear lower audit fees.
On the other aspect, it is argued that the committee overlap influences the ability of
individual directors to positively contribute to the company. Members of overlapping
committees will not have enough time, energy and resources to monitor all of the company’s
activities, such as audit, remuneration and risk management affairs. As a result, the
delegated tasks are not well served (Chandar et al., 2012). What is more, this would impair
the ability of directors; particularly independent directors to play their role objectively and
could affect their independence. Furthermore, the existence of these overlapping
committees might cause the usage of incentive-based performance in determining
director’s remuneration to be consistently monitored by the audit committee and thus
performance-based incentives could be less likely applied in the future. Low reward plans
by a company may discourage the top management to work hard, which eventually affects
the company’s performance adversely.
Because of difference of arguments in explaining the effect of overlapping towards
company’s performance, we hypothesise the following:
H1f. There is a relationship between the proportion of overlapping directors on the RC
and firm performance.
2.2.7 Gender of the risk committee and corporate financial performance. Gender
differences are a commonplace in today’s increasingly challenging world. Gender
differences or issues of inequality are not confined to certain geographical area and they
exist in many aspects including in business activities.
For example, in financial statement auditing, gender differences between auditors
influences audit planning and audit process (Ittonen and Peni, 2012). They argued that
female auditors are more meticulousness, committed and being attentive about their job.
Generally, female auditors support for ethical behaviour practices and adhere to the good
ethical values (Hardies et al., 2015). Furthermore, Gold et al. (2009) explain that women
audit staff are risk averse in audit procedures and concern on moral development (Bernardi
and Arnold Sr, 1997). To safeguard shareholder’s interests and offer high-quality job, one
must be ethical and trustworthy; and this is the trait that women possess (Ittonen and Peni,
2012; Hardies et al., 2015). Hence, it is not surprising that women audit partners positively
enhance the quality of financial statements (Al-Dhamari and Chandren, 2018).
Based on prior discussions and studies, women and men show differences in behaviour,
level of work and planning, confidence level and risk tolerance. In fact, women are said put
more effort in establishing strong audit procedures to avoid losses and reduce control and
detection risks. Such characteristics are priori likely to influence and enhance the quality of
any intended outputs (Niskanen et al., 2011).
Following the above arguments, this study expects that the appointment of women in the
RC will add value to the quality of risk management process and help improving the
company’s performance. Thus, the following hypothesis is formulated:
H1g. There is a positive relationship between the proportion of women on the RC and firm
performance.
2.3 Risk committee, political connection and corporate financial performance

The connection between business and government has been a global issue
extensively discussed in academic literature. Prior studies (Johnson and Mitton, 2003;
Ferguson and Voth, 2008; Goldman et al., 2008; Li et al., 2008; Amore and Bennedsen,
2013; Su and Fung, 2013; Chen et al., 2014) provide empirical evidence that PCFs
experience better performance. Several reasons are advanced in the literature to support
the positive relation between political connection and firm performance. Firstly, Su and Fung
(2013) suggest that developing political connections helps firms to increase their sales and
to incur lower cost of financing. According to the resource-based theory, political
connections provide firms with completive advantages derived from tangible and intangible
resources provided by the government that are difficult or costly for competitors to acquire.
Therefore, firms are priori likely to establish political connections to secure key resources
controlled by the government. Secondly, prior studies have suggested economic benefits a
firm can gain from having close ties with politicians, which include:
䊏 securing government contracts;
䊏 obtaining government bailouts in case of financial distress;
䊏 reduced regulatory enforcement;
䊏 securing property rights protection;
䊏 paying lower taxes;
䊏 receiving government subsides;
䊏 receiving legal and non-legal protection; and
䊏 favourable government policies that prevent competitors from entering the market.
Such benefits should reflect favourably on firm’s accounting and market performance.
Thirdly, Niessen and Ruenzi (2010) argue that the positive impact on firm performance
stems from politicians’ insight about the future economic policies and independent view
politicians can provide on the firm, which ultimately positively impacts its performance.
Finally, Li et al. (2008) opine that cultivating political connections can help private
companies to avoid government discrimination and overcome the market failures that are
prevalent in emerging economies. Political ties can also help companies to obtain political
legitimacy which, in return, enable them to receive exclusive government endorsements
and favourable treatment (Sheng et al., 2011).
Empirical results support the benefits associated with political relationships and how they
ultimately improve firm performance. Ding et al. (2014), using Chinese data for 2004–2006
period, provide evidence that political connections of board chairs and top management
improves firm accounting performance, particularly when the government holds ultimate
control of the firm. Wu et al. (2012) examine the effect of political connections on firm
performance of private vs state-owned companies and find that political connections can
benefit private companies through lower taxation and, thus, private companies with
politically connected managers outperform those without connected managers. A study of
Zhang et al. (2014) on wind and solar manufacturing firms suggest that government
subsidies can boost financial performance of Chinese companies. Wong (2010) uses firms’
data from Hong Kong to show that PCFs enjoy enhanced accounting and market
performance. Li et al. (2016) and Wang et al. (2019), using government officials’ corporate
site visits to measure political connections, empirically document that Chinese firms that
received officials’ visits obtain more new investment projects and bank loans, which could
ultimately improve their performance. Niessen and Ruenzi (2010) examine the effect of
political connections on performance of German firms. The regression results show that
PCFs experience better accounting and stock market performance.
However, establishing close relations with the government is not always beneficial to a firm
as it may have negative effect and is considered “grabbing hand” when government
officials engage in rent-seeking behaviour to obtain personal benefits at the expense of the
firm (Shleifer and Vishny, 1994; Wong and Hooy, 2018). The negative effect of political
connection can be explained from the perspective of the agency theory. Based on the
theory, governments seek different objectives that may go against firm value-maximizing
objective. For instance, government officials may use corporate’s resources to benefit their
cronies and supporters, who in return provide votes, political contribution and bribes (La
Porta et al., 2002; Bushman et al., 2004). Moreover, they may squander the corporate
resources in financing election campaigns, building popular support for the government or
overinvesting in negative return regions to secure votes for connected politicians (Boubakri
et al., 2013). Squandering the firm’ resources in non-value maximizing activities may
eventually affect the company performance adversely. Grabbing hand theory alleges that
political connection may entrench the resource of the firm through systematic favours of
directors which may have serious consequence of firm value.
The adverse nexus between political connection and firm performance is well documented
in the literature. For instance, Saeed et al. (2016) report that firms with politically connected
board members underperform non-connected firms by 17% and 15% based on return on
assets (ROA) and return on equity (ROE), respectively. Fan et al. (2007), using data on
newly privatised Chinese firms, empirically document that firms with politically connected
chief executive officers underperform firms without such connection. Using a survey of 241
Chinese firms, Sheng et al. (2011) find that business ties have a stronger positive influence
on performance than political ties. Li et al. (2008), using political connection index to
measure political influence, report that political connection is negatively significantly
associated with firm financial performance. Similar results were also found in studies of
Boubakri et al. (2008), Faccio (2010), Asquer and Calderoni (2011), Cao et al. (2011) and
Chen et al. (2014) who empirically provided evidence of PCFs underperforming non-
connected firms.
From above discussion, it seems that political influence is a double-edged sword with
the co-existence of both a positive and negative effect. These two-side impacts
suggest there may be countervailing effects of political connection in accentuating or
attenuating the association between the RC and firms’ financial performance. On one
hand, political connection can be viewed as a signal of government endorsement and
support, which could ultimately minimise uncertainty, operational and information risk.
Wang et al. (2019) find that the improvements in performance of PCFs are
accompanied by a reduction in transaction costs and information asymmetry. On the
other hand, companies can be treated as cash cows by government officials, and
political connection of these companies’ board members and executives may facilitate
squandering the companies resources in social and governmental agenda, which
could explain the increase in operating and information risk of PCFs. Literature shows
that PCFs are riskier and have poor governance practices and performance (Fan et al.,
2007; Ling et al., 2016).
If the first argument holds true and political influence is beneficial to a firm, as argued by the
resource-based theory, one may expect that the value of an RC in improving a firm
performance may be diluted for PCFs [1]. However, if political connection spurs on
uncertainty and external risks, as suggested by the agency theory, we conjecture that the
RC plays a more dominant role in improving the financial performance of PCFs than non-
PCFs. Anecdotal evidence suggests that political connection is not valuable, particularly in
emerging economies such as Malaysia (Fan et al., 2007; Zhang et al., 2014; Saeed et al.,
2016). Moreover, Bliss and Gul (2012) empirically conclude that Malaysian borrowing PCFs
had significantly lower ROA compared to non-PCFs. Therefore, based on the agency and
grabbing hand theory, we hypothesise that:
H2. The expected benefits of RCs to improve financial performance are augmented in
PCFs.
3. Research design
3.1 Sample
To achieve the objectives of this research, we draw our sample from all financial companies
listed in Bursa Malaysia for years 2004–2018. We focus on financial companies because
financial sector is the second highest after manufacturing, trade and service sector and
there is significant investment of the government in the sector (Kallamu, 2015). Furthermore,
RCs are much more common among firms in financial sector (Ames et al., 2018; Elamer and
Benyazid, 2018). We start with the year 2004 because it was not until 2003 that financial
listed firms in Malaysia were required to establish separate RCs [2]. The year 2018 was
chosen as last year because it is the last year in which data could be collected during data
collection process. After excluding observations with missing values for RC (87
observations) and financial variables (8 observations), our final sample ended up with 400
firm-year observations.
While panel A of Table 1 discusses the sample selection procedure, panel B of Table 1
presents the political connection distributions of sample firms by year. The number of firm-
year observations across the study sample years is relatively uniform. However, all our
regression specifications include year fixed effects to control for any variations in year
distribution of sample firms. Moreover, the number of PCFs across the study sample years
is remarkably small.
3.2 Variables
3.2.1 Dependent variables. A firm’s performance is measured by ROA and Tobin’s Q. This
study uses ROA as a measure of accounting performance, and Tobin’s Q as a measure of
market performance. While ROA is defined as net income before financing cost over
average total assets, Tobin’s Q is market value of equity plus book value of total liabilities
divided by book value of total assets. We focus on ROA and Tobin’s Q because they have
Table 1 Sample selection procedure and political connections distribution

Panel A: Sample selection procedure (2004–2018)
Firm years
Initial financial companies listed in Bursa Malaysia 495
Less: observations with missing RC and financial information 95
Final sample 400
Panel B: Political connection distribution of sample firms by year
Connected firms
Years No. of obs # (%)
2004 23 4 17.39
2005 26 4 15.38
2006 26 4 15.38
2007 27 3 11.11
2008 26 1 3.85
2009 26 1 3.85
2010 26 1 3.85
2011 26 0 0
2012 25 1 4
2013 28 1 3.57
2014 28 1 3.57
2015 27 2 7.41
2016 28 2 7.14
2017 28 2 7.14
2018 30 2 6.67
Total 400 29 7.25
been widely used in previous literature [3]. Data on ROA and Tobin’s Q are retrieved from
the Datastream database.
3.2.2 Explanatory variables. The major explanatory variable of interest is RC effectiveness.
We use the following disaggregated variables to represent the effectiveness of RC:
RC existence (RCEX): RCEX is a dummy variable the captures the existence of a separate
RC. Following previous studies (Yatim, 2010; Hines and Peters, 2015; Al-Hadi et al., 2018;
Elamer and Benyazid, 2018; Abdullah and Said, 2019), we assign the value of 1 to a firm
with a separate RC in a financial year and 0 otherwise.
RC independence (RCINDP): Under the MCGC, a member of an RC is defined as
independent, if he/she is not an officer of the firm, is independent from the management
and controlling shareholders and is not representative of concentrated or family holdings of
its shares. In this study, we follow Yeh et al. (2011), Ng et al. (2013) and Elamer and
Benyazid (2018) and measure RC independence as the proportion of independent
directors to RC members.
RC size (RCSIZE): RCSIZE is measured as the number of directors on the RC (Ng et al.,
2013; Battaglia et al., 2014; Al-Hadi et al., 2016; Elamer and Benyazid, 2018).
RC diligence (RCDELG): The number of RC meetings in a financial year was used to
capture the RC diligence (Hoque et al., 2013; Ng et al., 2013; Battaglia et al., 2014; Elamer
and Benyazid, 2018).
RC qualification (RCQUAL): We follow Tao and Hutchinson (2013) and Al-Hadi et al. (2016)
and use academic (e.g. bachelors/master/PhD) or professional (e.g. certified public
accountant/certified financial analyst/association of chartered accountants) qualifications in
finance/accounting to define the qualifications of RC members. We, then, measure
RCQUAL as the proportion of directors in an RC with academic or professional qualification
in accounting/finance to RC members.
RC overlap (RCOVLP): RCOVLP is measured as the proportion of RC members who also sit
on any one of the other three committees such as audit, compensation and nomination
committee (Tao and Hutchinson, 2013).
RC gender (RCGNDR): We use the proportion of women in an RC to RC members to
measure RCGNDR.
Consistent with Tao and Hutchinson (2013), Al-Hadi et al. (2016) and Elamer and Benyazid
(2018), we develop a factor score using a principle component analysis of the seven RC
attributes discussed above. The score is used as aggregated independent variable
(RCFACTOR) to capture the RC attributes as a whole and to measure RC effectiveness.
Appendix shows the results of the principle component analysis for RC variables. As shown
in the Appendix, the eigenvalue of the RC captures roughly 23% of the variations in the RC
attributes, indicating a considerable representativeness of RCFACTOR. Data on RC
variables are retrieved from the annual reports of the sample firms.
The second explanatory variable of interest is political connection. Following prior studies
(Su and Fung, 2013; Saeed et al., 2016; Wong and Hooy, 2018), we use a dummy variable
that equals 1 if one of the firm’s board members is politically connected to measure the
presence of political influence (PCON). A board member is considered to be politically
connected if he/she is a member of parliament, a minister, a head of state, a state of
assemblyman or a person who is or was working under a government bureaucrat (Faccio,
2006; Chaney et al., 2011; Al-Dhamari and Ku Ismail, 2015). The profile of board members
is extracted from the annual reports of the sample firms. While the list of parliament
members and senators is obtained by the official portal of parliament of Malaysia (www.
parlimen.gov.my), the list of state assemblymen is taken from official website of Election
Commission of Malaysia (www.spr.gov.my). The names of politicians from the two lists are
used to cross-check the names on the board members from a company’s annual report. If a
politician’s name is matched to a company director’s name, that company is considered
politically connected.
3.2.3 Control variables. We include two groups of control variables which prior studies
found to affect a firm financial performance: firm financial information and board of directors’
characteristics (Sohail et al., 2017; Allam, 2018; Ames et al., 2018; Elamer and Benyazid,
2018; Chaudhry et al., 2020) . Firm financial information includes firm size measured by the
natural logarithm of total assets (SIZE); financial leverage measured by total debt over total
assets (LEV); and liquidity measured by total assets over total liabilities (LIQUID).
Board size and qualification represent the bulk of the board of directors’ characteristics.
Therefore, we measure board size as the number of directors on the board (BODSIZE) and
board qualification as the proportion of board members with academic or professional
qualification in accounting/finance (BODQUAL). While firm financial data is obtained by the
Datastream database, data on board of directors’ characteristics is extracted from the
annual reports of the sample firms.
3.3 Methodology
To examine the association between the effectiveness of RCs and firm financial
performance, we use the following regression model:
PERFit ¼ b 0 þ b 1 RCFACTORit þ b 2 PCONit þ b 3 SIZEit þ b 4 LEVit þ b 5 LIQUIDit

þ b 6 BODSIZEit þ b 7 BODQUALit þ b 8 YEARit þ error terms (1)
Where PERF denotes ROA and Tobin’s Q as measurement of performance of firm i at time t.
The rest of the variables are defined previously. Our variable of interest is RCFACTOR which
captures the effectiveness of an RC. We expect the coefficient on this variable to be positive
and significant. In additional analysis, we test the association between RC characteristics
and firm performance by replacing RCFACTOR with individual RC variables discussed in
Section 3.2.2.
To test whether the association between RC effectiveness and firm financial performance is
influenced by political connection, we specify the following estimation model:
PERFit ¼ b 0 þ b 1 RCFACTORit þ b 2 PCONit þ b 3 RCFACTOR PCONit þ b 4 SIZEit þ b 5 LEVit

þ b 6 LIQUIDit þ b 7 BODSIZEit þ b 8 BODQUALit þ b 9 YEARit þ error terms (2)
An interaction term RCFACTOR PCON was included in Model 2 to test whether the
influence of RC effectiveness on firm performance is impacted by political connection. If
political connection is considered detrimental to a firm, we expect an effective RC to play
more important role in monitoring and managing risks, thereby improving financial
performance of PCFs. Therefore, a positive and significant coefficient on b 3 is expected.
We winsorise (RCINDP, RCSIZE, RCDELG, RCOVLP, RCGNDR and BODQUAL) at 1.99
percentile and (ROA, Tobin’s Q and LIQUID) at 5.95 percentile to normalise the variables.
To control for the heteroskedasticity, autocorrelation and cross-sectional dependency
problem, we use ordinary least squares (OLS) with Driscoll and Kraay’s corrected standard
errors [4].
4. Empirical results
4.1 Descriptive statistics and correlations
Table 2 presents descriptive statistics and the Person correlation analysis results for the key
variables included in the regression models and used in the main and additional analysis.
Table 2 Descriptive statistics and correlation analysis
Variables Mean SD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
ROA % 2.895 4.717 1

Tobin’s Q 1.066 0.500 0.467 1
RCEX(3) 0.600 0.491 0.142 0.280 1
RCINDP(4) 0.750 0.233 0.028 0.018 0.295 1
RCQUAL(5) 0.389 0.292 0.043 0.011 0.095 0.227 1
RCSIZE(6) 3.785 1.405 0.085 0.310 0.251 0.053 0.014 1
RCDELG(7) 5.518 2.659 0.328 0.065 0.175 0.063 0.056 0.240 1
RCOVLP(8) 0.796 0.293 0.063 0.167 0.295 0.153 0.193 0.049 0.055 1
RCGNDR(9) 0.136 0.186 0.059 0.101 0.008 0.149 0.041 0.093 0.065 0.005 1
RCFACTOR(10) 0.000 1.260 0.170 0.275 0.810 0.415 0.214 0.601 0.497 0.325 0.036 1
BODQUAL(11) 0.335 0.184 0.013 0.007 0.034 0.237 0.644 0.091 0.046 0.156 0.009 0.080 1
BODSIZE(12) 8.090 2.222 0.112 0.227 0.263 0.148 0.094 0.372 0.328 0.000 0.242 0.346 0.0145 1
SIZE (log) (13) 15.809 2.262 0.504 0.057 0.271 0.098 0.007 0.298 0.540 0.096 0.119 0.416 0.026 0.487 1
LEV % (14) 11.194 15.793 0.116 0.144 0.170 0.250 0.104 0.051 0.039 0.142 0.034 0.029 0.063 0.092 0.021 1
LIQUID(15) 6.253 29.935 0.258 0.290 0.235 0.104 0.033 0.175 0.239 0.028 0.036 0.298 0.050 0.244 0.578 0.156 1
PCON(16) 0.073 0.260 0.014 0.068 0.169 0.411 0.188 0.088 0.077 0.006 0.120 0.163 0.142 0.094 0.105 0.243 0.104 1
Notes: The definitions of the variables are in Section 3.2. All are based on a sample size of 400 firm-year observations. Italic indicates statistical significance at the 5% level or better
The mean values for the ROA and Tobin’s Q are 2.895 and 1.066%, respectively. Although
Bank Negara requires financial companies in Malaysia to set up a separate RC, only 60% of
sample firms established a separate RC. However, Table 2 shows that for 75% of sample
firms, the majority of RC members are independent, indicating that Malaysian financial firms
meet the requirement of having at least one independent director in an RC. Table 2 also
reports that mean size of the RC is 3.785 and the mean number of RC meetings is 5.518. On
average, 38.9% of firm-year observations have at least one director with an academic/
professional qualification. We also report that the mean of the proportion of RC with
overlapping directors is 79.6% and that of RC with female members is 13.6%. Only 7.3% of
sample firms have politically connected directors.
As shown in Table 2, the coefficient in the correlation matrix do not show any concern about
high correlations among independent variables except the highest correlation between
RCFACTOR and RCEX (0.81). However, the two variables are entered in regression models
separately.
4.2 Regression results

In Table 3, Models 1 and 3, we test whether the effectiveness of an RC (RCFACTOR, which
consists of RC existence, RC independence, RC qualification, RC size, RC diligence, RC
overlapping and RC gender) improves sample firms’ financial performance (ROA and
Tobin’s Q, respectively). The results show that coefficients of RCFACTOR are positive and
statistically significant for both ROA ( b = 0.074 at p < 0.10) and Tobin’s Q ( b = 0.061 at
p < 0.01), suggesting that the existence of an effective RC enhances both accounting and
market performance. In terms of economic effects, we find that one standard deviation
change in RCFACTOR leads to 1.98% change in ROA and 15.37% in Tobin’s Q. The
regression results suggest that effective RCs will assist organisations in achieving their
objectives and securing their reputations, thereby improving the firms’ financial
performance. Moreover, the results also uphold the agency theory’s argument that an
effective RC plays important role in mitigating the conflict of interest between the
shareholders and managers which may lead to enhanced company performance.
We also examine whether the association between the effectiveness of an RC and financial
performance is influenced by political connectedness. The results for the interaction
Table 3 OLS Regression results on RC effectiveness (RCFACTOR), political connection

(PCON) and financial performance (ROA and Tobin’s Q)
ROA Tobin’s Q
Variables Model 1 Model 2 Model 3 Model 4
Intercept 15.260 (15.570) 15.120 (14.670) 1.891 (15.150) 1.867 (13.190)

RCFACTOR 0.074 (1.710) 0.019 (0.423) 0.061 (4.353) 0.052 (4.082)
PCON 1.334 (1.917) 2.167 (3.737) 0.019 (0.209) 0.125 (1.926)
RCFACTOR
PCON 1.261 (2.057) 0.218 (3.390)
SIZE 0.917 (14.290) 0.920 (13.07) 0.064 (6.510) 0.064 (6.442)
LEV 0.028 (2.692) 0.025 (2.798) 0.004 (3.842) 0.005 (5.500)
LIQUID 0.127 (1.385) 0.130 (1.456) 0.081 (7.256) 0.082 (7.866)
BODSIZE 0.281 (6.295) 0.315 (4.721) 0.037 (3.903) 0.043 (4.663)
BODQUAL 0.397 (0.674) 0.511 (0.874) 0.078 (0.760) 0.097 (0.795)
YEAR Yes Yes Yes Yes
R2 0.331 0.337 0.257 0.270
Observations 400 400 400 400
Notes: The definitions of the variables are in Section 3.2. t-statistics in parentheses and are based on
Driscoll and Kraay’s standard errors. , and represent statistical significant at the p < 1%, 5%
and 10% levels, respectively
between political connection (PCON) and the effectiveness of the RC (RCFACTOR) are
presented in Models 2 and 4 of Table 3, respectively. Consistent with prior literature
reporting that political connection in Malaysia is not beneficial to shareholders (Bliss and
Gul, 2012; Al-Dhamari and Ku Ismail, 2015), as shown in Models 1, 2 and 4 of Table 3, we
find that the coefficients for the stand-alone PCON are negative and statistically significant
for both ROA and Tobin’s Q. The negative coefficients suggest that firms with politically
connected board members experience lower accounting and market performance. The
results, on the other hand, stand in sharp contrast to prior studies conducted also in
Malaysia and find that political influence is a valuable asset that a firm can have to increase
its performance (Johnson and Mitton, 2003; Mitchell and Joseph, 2010) [5].
However, the coefficients for our variable of interest, i.e. the interaction term of PCON and
RCFACTOR, are positive and statistically significant for both ROA ( b = 1.261 at p < 0.05)
and Tobin’s Q ( b = 0.218 at p < 0.01). As expected, the results suggest that role of an RC
effectiveness in improving the sample firms accounting and market performance is more
pronounced for PCFs. Models 2 and 4 indicate that a one increase in PCON significantly
enhances the effectiveness of an RC in improving ROA (Tobin’s Q) from 0.019 to 1.280
(0.052–0.270). The impact of political connection on the relationship between the
RCFACTOR with ROA and Tobin’s Q upholds the agency and grabbing hand theory
arguments that government officials may squander the firm resources in financing election
campaigns, building popular support for the government or overinvesting in negative return
regions to secure votes for connected politicians, thereby decreasing the firm financial
performance. Therefore, shareholders of PCFs may demand establishing an effective RC to
attenuate the potential risk stems from the cultivation of close link with government and to
enhance the performance of PCFs [6].
5. Additional analysis and robustness checks

5.1 Additional analysis: risk committee attributes, political connection and firm
financial performance
The main findings reveal that firms with effective RCs experience higher accounting and
market performance, and this positive effect is more pronounced in PCFs. To examine the
association between RC attributes and financial performance, we replace RC score
(RCFACTOR) with the seven RC attributes (RCEX, RCINDP, RCSIZE, RCDELG, RCQUAL,
RCOVLP and RCGNDR) discussed in Section 3.2.2. We also interact the RC attributes with
PCON to test the possible effect of political connection on the RC attributes–performance
relationships. Models 1 and 3 of Table 4 report the regression results for the influence of the
RC attributes on ROA and Tobin’s Q, respectively, while Models 3 and 4 report the
regression results for the interaction effects of each RC variable with PCON. In Models 1
and 3 of Table 4, we find that coefficients of RCSIZE are positive for both ROA and Tobin’s
Q ( b = 0.537 and b = 0.074, respectively), which are statistically significant at p < 0.01;
while those of RCDELG are negative and significant ( b = 0.140 at p < 0.10 for ROA and
b = 0.022 at p < 0.05 for Tobin’s Q).
The regression results show that the association between RCEX (RCINDP) and Tobin’s Q
(ROA) is positive and statistically significant. The coefficient of RCEX is 0.100 (significant at
0.10) and that the coefficient of RCINDP is 1.727 (significant at 0.05). The results, to some
extent, support the view that forming a separate RC can help in minimizing risks facing a
company and independent directors of the RC are effective monitors that can improve firm
performance. Model 1 of Table 4 shows the estimated coefficient of RCQUAL is positive
and significant ( b = 0.880 at p < 0.05). This result, albeit only reported for ROA, suggests
that qualified directors apply accounting standards better in the risk management process,
which enhances the effectiveness of the RC in risk monitoring, management and reporting
(Al-Hadi et al., 2016). Moreover, RCOVLP (RCGNDR) is positively and significantly
associated with Tobin’s Q (ROA). On one hand, the positive coefficient on RCOVLP
Table 4 OLS regression results on RC attributes, political connection (PCON) and financial performance (ROA
and Tobin’s Q)
ROA Tobin’s Q
Variables Model 1 Model 2 Model 3 Model 4
Intercept 13.230 (14.580) 14.410 (19.680) 1.411 (13.450) 1.450 (11.690)

RCEX 0.222 (0.817) 0.219 (0.903) 0.100 (1.984) 0.099 (2.197)
RCINDP 1.727 (2.447) 1.056 (1.214) 0.110 (0.918) 0.103 (1.099)
RCSIZE 0.537 (9.151) 0.488 (10.730) 0.074 (9.256) 0.069 (10.010)
RCDELG 0.140 (1.889) 0.146 (1.954) 0.022 (2.627) 0.023 (2.661)
RCQUAL 0.880 (2.435) 1.056 (2.619) 0.045 (1.026) 0.070 (1.534)
RCOVLP 0.297 (0.892) 0.403 (1.274) 0.125 (3.545) 0.117 (3.447)
RCGNDR 1.529 (2.027) 1.582 (1.892) 0.022 (0.289) 0.014 (0.144)
PCON 0.741 (0.782) 15.020 (7.740) 0.078 (0.538) 1.846 (13.260)
RCEX PCON 4.177 (4.177) 0.755 (6.450)
RCINDP PCON 0.703 (0.105) 0.038 (0.047)
RCSIZE PCON 1.768 (3.112) 0.192 (4.231)
RCDELG PCON 0.291 (0.817) 0.030 (0.668)
RCQUAL PCON 0.116 (0.051) 0.452 (1.645)
RCOVLP PCON 3.141 (1.164) 0.299 (0.783)
RCGNDR PCON 0.508 (0.048) 0.660 (0.558)
SIZE 0.894 (0.11.400) 0.898 (14.010) 0.049 (4.046) 0.047 (4.442)
LEV 0.028 (2.394) 0.033 (3.543) 0.004 (2.791) 0.003 (3.893)
LIQUID 0.101 (1.013) 0.106 (1.286) 0.075 (6.472) 0.073 (6.935)
BODSIZE 0.219 (6.446) 0.194 (3.080) 0.029 (3.086) 0.029 (2.413)
BODQUAL 1.188 (1.452) 1.599 (2.586) 0.108 (1.283) 0.160 (1.903)
YEAR Yes Yes Yes Yes
R2 0.391 0.428 0.333 0.380
Observations 400 400 400 400
Notes: The definitions of the variables are in Section 3.2. t-statistics in parentheses and are based on Driscoll and Kraay’s standard
errors. , and represent statistical significant at the p < 1%, 5% and 10% levels, respectively
suggests that overlapping members of an RC have more access to information on the level
of firm’s risk and the factors that may affect company management risk-taking decisions,
which can help them in risk management functions including minimizing information
asymmetry and thus improving market performance (Tao and Hutchinson, 2013). On the
other hand, the positive effect of RCGNDR implies that RCs with female directors are more
likely to prevent company management from indulging in risky projects, thereby reducing
operation risk. Furthermore, female directors on RCs are more likely to spend more time on
risk management functions, which improves the effectiveness of the RC in risk monitoring
and untimely enhances firm’s accounting performance.
In terms of interaction of RC variables with PCON, the coefficient for interaction term
RCEX PCON is positive and statistically significant for both ROA ( b = 4.177 at p < 0.01)
and Tobin’s Q ( b = 0.755 at p < 0.01), suggesting that board of directors’ PCFs with a
separate RC report higher accounting and market performance. Moreover, the interaction
term of RCSIZE and PCON is also positively and significantly related to both ROA ( b =
1.678 at p < 0.01) and Tobin’s Q ( b = 0.192 at p < 0.01), implying that the effectiveness
of RC size in improving accounting and market performance is more pronounced in PCFs.
These findings, to some extent, support our conjecture that PCFs with effective RC
attributes enjoy higher accounting and market performance.
5.2 Robustness checks: endogeneity testing

It is plausible that profitable firms form a separate and an effective RC, i.e. the relation
between the effectiveness of RC and firm performance may run in the other way around.
Moreover, it is also plausible that our variable of interest RCFACTOR is endogenous and
correlated with standard errors. Therefore, to examine whether the association between the
effectiveness of RC and financial performance is or is not confounded by endogeneity, we
adopt the instrumental variables 2 stage least squares (IV2SLS).
Guided by Hines and Peters (2015) and Al-Hadi et al. (2016), we use the following firm-
specific characteristics as instrumental variables: board size, board qualification, firm
complexity, firm size, leverage and audit quality [7]. We also use the lag of ROA as
instrumental variable to alleviate the concern of reverse causality discussed earlier. The use
of past year ROA as instrumental variable can be justified on the basis that past year
profitable firms are priori likely to establish an effective RC. Table 5 reports the 2 stage least
squares (2SLS) regression results for the impact of the effectiveness of RC (RCFACTOR) on
sample firms’ financial performance. In Table 5, we find the coefficients of RCFACTOR are
positive and statistically significant and that of PCON are negative and significant for both
ROA and Tobin’s Q. This confirms our main results reported in Models 1 and 3 of Table 3
and indicates that our findings are not unduly influenced by the endogeneity [8].
We also conduct Hausman’s endogeneity and Sargan’s over-identifying tests to ensure that
the RCFACTOR is endogenous and the instruments are not correlated with error terms,
respectively. The Hausman’s test supports the endogeneity of RCFATOR, suggesting that
2SLS estimates have more preference over the OLS estimate. Moreover, the Sargan
statistic supports the null hypothesis, implying that the instruments as a group are
exogenous and valid.
6. Conclusion remarks
RCs have become widespread and pertinent issue for financial firms, particularly after the
financial crisis. Although there exists quite recent evidence on the effect of board RCs on
firms’ financial performance (Yeh et al., 2011; Aebi et al., 2012; Ames et al., 2018; Elamer
and Benyazid, 2018), no empirical evidence yet exists on how political connection may
have impact on such relation. Some prior studies have documented evidence of political
connections conferring economic benefits to firms, which eventually enhance the firms’
performance. Others found PCFs to report the worse performance in the market. Motivated
by the mixed results in the prior research, our study examines whether the effectiveness of
the RC adds value to our sample firms by positively impacting their financial performance.
The study then explores the role of political ties in RC–performance relationship to
contribute to the extant corporate governance, board RCs and firm performance literature
Table 5 2SLS regression results on RC effectiveness (RCFACTOR) and financial performance

(ROA and Tobin’s Q)
ROA Tobin’s Q
Variables Coefficient T-statistic Coefficient t-statistic
Intercept 19.640 6.934 3.250 5.517

RCFACTOR 1.848 2.054 0.601 3.211
PCON 3.433 2.712 0.600 2.278
SIZE 1.156 7.230 0.138 4.158
LEV 0.038 3.131 0.010 0.400
LIQUID 0.036 0.283 0.048 1.807
BODSIZE 0.049 0.334 0.031 1.000
BODQUAL 1.417 1.347 0.372 1.699
YEAR Yes Yes
Hausman test 37.674 (p = 0.000) 62.894 (p = 0.000)
Sargan statistic 3.832 (p = 0.147) 2.222 (p = 0.329)
Observations 365 365
Notes: The definitions of the variables are in Section 3.2. , and represent statistical significant
at the p < 1%, 5% and 10% levels, respectively
and more importantly to contribute theoretically to interface between these two strands of
political influence through the lens of the agency perspective.
Our results reveal that both ROA and Tobin’s Q are higher for firms with an effective RC.
Moreover, we find that the effectiveness of RCs in monitoring and management of risk is
more pronounced for PCFs. Additional analysis demonstrates that RC attributes (i.e. RC
independence, qualification and gender) are positively and significantly associated with
ROA, while those of RC existence and overlap are positively and significantly related to
Tobin’s Q. We also find that RC size (RC diligence) has a positive (negative) impact on
sample firms accounting and market performance. Moreover, the regression results of
additional analysis show that PCFs with a separate as well as larger RCs experience both
higher accounting and market performance. Overall, our findings suggest that RCs are
effective and beneficial channel to improve financial performance. Moreover, in line with the
view of the agency theory, our study empirically documents that the expected benefits of
RC are augmented for PCFs.
Our results carry several important practical and policy implications. Firstly, although many
researchers and practitioners opined that board of directors and an audit committee are
two cornerstones for an effective governance system, our study suggests an RC as a
substantive monitoring mechanism over various risk activities. Secondly, our study results
may help to resolve the apparent paradox in the literature concerning political influence by
suggesting that political connectedness is detrimental to the performance of financial firms
in Malaysia and an effective RC is capable of alleviating potential risk of political ties.
Thirdly, as our findings support that top executives are significantly influenced by the RC
attributes in their extensive risk-taking decisions, investors may also make use of RC
information in their evaluation of firms’ performance. Finally, our results support initiatives of
regulatory bodies in Malaysia to establish a stand-alone RC.
Wong and Hooy (2018) provide empirical evidence that different types of political
connections (i.e. government-linked companies, board of directors, businessman and
family members) have different impacts on Malaysian firms’ performance. Therefore, future
studies are welcome to examine the effect of these types on the association between RC
and firm performance in Malaysian context. Moreover, Wu et al. (2012) concludes that
political connection of managers is not beneficial to local state-owned enterprises. We
encourage future research to explore the impact of political connection of board of directors
on financial performance for both government-linked and non-government-linked
companies in Malaysia. Given that our study’s sample is restricted to financial firms, future
research can further investigate the relations hypothesised in our study in non-financial
firms, to generalise the reported findings in our study. Finally, exploring the potential impact
of institutional investors on relationship between board RCs and financial performance will
be an interesting extension of the current study.
Notes
1. Based on the same theory view, however, we can also expect that PCFs are priori likely to have
more resources through their link with government to form a separate RC that can effectively
enhance firm performance.
2. In 2003, financial listed firms in Malaysia were required by Bank Negara to establish a separate RC
which should consist of not less than three directors, a majority of whom must be non-executive and
to be shared by independent director.
3. We have also used ROE as another measure of accounting performance and found similar results.
4. Breusch–Pagan/Cook–Weisberg test rejects the null hypothesis that the variance of the error terms
is free of the heteroskedasticity problem (X2 = 7.62, p-value = 0.005 for ROA model and X2 = 98.04,
p-value = 0.000 for Tobin’s Q model). Moreover, Wooldridge test rejects the null hypothesis of no
first order autocorrelation (F = 10.364, p-value = 0.0032 for ROA model and F = 31.330, p-value =
0.000 for Tobin’s Q model).
5. We find over 71% of sample firms are government-linked. Having ownership link with the
government establishes more stable ties than a politically connected board members’ personal link
with government. This may indicate that the role of politically connected board of directors in
obtaining government-related benefits is not important for our sample firms. Moreover, given that
the government as substantial shareholder may intervene in selecting board members, in our
sample firms, politically connected board members may detract from firm performance because
they need to implement the government’s social and political objectives. These two arguments
could explain the negative effect of PCON we found in our results.
6. One may infer, from based-resource theory perspective, that PCFs have more resources to form an
effective and separate RC and thus, the effect of RCs on performance is accentuated for PCFs.
However, our results are more consistent with the agency theory’s view as we found PCON
deteriorates sample firms’ performance.
7. Please refer to these studies for the justifications of using abovementioned variables as
instruments.
8. We also used one year lagged of explanatory and control variables and find the significant levels
for all variables reported in the main analysis remain virtually unchanged.
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Appendix
Table A1 Principle component analysis for RC variables

Component Eigenvalue Difference Proportion Cumulative
RC existence 1.588 0.188 0.227 0.227

RC independence 1.400 0.300 0.200 0.427
RC size 1.101 0.084 0.157 0.584
RC diligence 1.016 0.183 0.145 0.729
RC qualification 0.834 0.224 0.119 0.849
RC overlap 0.610 0.159 0.087 0.936
RC gender 0.451 0.064 1.00
Rotation: Promax
Variance Proportion
RCFACTOR 1.5883 0.2269
Corresponding author
Redhwan Aldhamari can be contacted at: redhwan@uum.edu.my
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The impact of political connection and risk committee on corporate ﬁnancial

Article in Corporate Governance International Journal of Business in Society · October 2020

Redhwan Al-dhamari Mohamad Naimi Mohamad Nor

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Abstract Redhwan Aldhamari,

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DOI 10.1108/CG-04-2020-0122 © Emerald Publishing Limited, ISSN 1472-0701 j CORPORATE GOVERNANCE j

2. Literature review and hypotheses development

2.2 Risk committee attributes and corporate financial performance

2.3 Risk committee, political connection and corporate financial performance

Table 1 Sample selection procedure and political connections distribution

PERFit ¼ b 0 þ b 1 RCFACTORit þ b 2 PCONit þ b 3 SIZEit þ b 4 LEVit þ b 5 LIQUIDit

PERFit ¼ b 0 þ b 1 RCFACTORit þ b 2 PCONit þ b 3 RCFACTOR PCONit þ b 4 SIZEit þ b 5 LEVit

ROA % 2.895 4.717 1

4.2 Regression results

Table 3 OLS Regression results on RC effectiveness (RCFACTOR), political connection

Intercept 15.260 (15.570) 15.120 (14.670) 1.891 (15.150) 1.867 (13.190)

5. Additional analysis and robustness checks

Intercept 13.230 (14.580) 14.410 (19.680) 1.411 (13.450) 1.450 (11.690)

5.2 Robustness checks: endogeneity testing

Table 5 2SLS regression results on RC effectiveness (RCFACTOR) and ﬁnancial performance

Intercept 19.640 6.934 3.250 5.517

Table A1 Principle component analysis for RC variables

RC existence 1.588 0.188 0.227 0.227

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