Does political connection influence corporate financial decisions in unstable political environment?

• Published date: 01 February 2023
• Author: Samar Riahi,Nadia Loukil
• Date: 01 February 2023
• DOI: http://doi.org/10.1002/pa.2850

RESEARCH ARTICLE

Does political connection influence corporate financial

decisions in unstable political environment?

Samar Riahi

1

| Nadia Loukil

1,2

1

FCF UR, Faculty of Economic Sciences and

Management of Tunis, University of Tunis El

Manar, Tunis, Tunisia

2

Institute of High Management, Bizerta,

University of Carthage, Tunis, Tunisia

Correspondence

Samar Riahi, FCF UR, Faculty of Economic

Sciences and Management of Tunis, University

of Tunis El Manar, Tunis, Tunisia.

Email: riahisamar33@gmail.com

The aim of this study is to examine the impact of political connection on the cost of

debt, the cost of equity and the investment level in an unstable political environment.

We use a sample of 55 Tunisian listed firms during the post-revolution period

(2011–2018) and we apply a generalized least square (GLS) approach to test our

hypotheses. Findings highlight that political connections increase the corporate finan-

cial costs and reduce the investment level. Furthermore, in an additional analysis, we

show on the one hand that political instability negatively affects the investment and

affects positively the cost of debt and the cost of equity. On the other hand, we

make evidence that the political instability level negatively affects the relation

between the political connection and the cost of debt. The contribution is, to the best

of our knowledge, the absence of studies conducted in Tunisia countries examining

the impact of political connection on the financial cost and investment level in an

unstable political environment such as Tunisia.

KEYWORDS

cost of debt, cost of equity, investment, political connection, political instability,

Tunisian listed firms

1|INTRODUCTION

A firm's financial and investment decision is essential for its survival.

In the literature, many previous studies have analyzed the role of

political relationships on the cost of debt (e.g., Bliss & Gul, 2012;

Claessens et al., 2008; Faccio, 2006; Fraser et al., 2006; Houston

et al., 2014; Johnson & Mitton, 2003; Joni et al., 2020; Khwaja &

Mian, 2005; Leuz & Oberholzer-Gee, 2006) or on the corporate

investment (e.g., An et al., 2016; Pan & Tian, 2020; Phan et al., 2020).

However, political connection could also affect the cost of equity.

Although the issue attracts the attention of managers, regulators and

researchers, few empirical studies have examined the effect of politi-

cal connection on the cost of equity other than a study by Boubakri

et al. (2012). In particular, past research tends to focus primarily on

one concept: cost of debt, cost of equity, or corporate investment.

In our study, we address this lack of knowledge of the impact of

political connection on the financial costs and on the investment level

in Tunisia which has not been taken into account in any previous

research. In particular, we raise an important question from this

article: Does the political connection affect the cost of debt, the cost

of equity and the corporate investment level?

The motivations behind this study are twofold. The first liesin the

choice of context and period of study. Before the 2011 revolution, we

cannot discuss different types of political links because in this period

the presidential family and its allies are those who dominate all the

political andeconomic activity of the country.After the revolution, sev-

eral businessmenentered political life and the wholepolitical landscape

changed; there are newpolitical parties (e.g., Ennahdha, NidaaTunis…),

changes in the president of the state, other issues;more freedom, more

democracy, elections. All these events have enabled Tunisia to move

into a transition phase. The second motivation is, to the best of our

knowledge, the absence of studies conducted in Tunisia countries

examining the impact of political connection on the financial cost and

investmentlevel in an unstable political environment.

Therefore, Tunisia was an interesting example to test our

research model. The main objective of this study is to understand the

impact of three types of political connection: (i) a representative of

the state or a minister, (ii) a member of the former presidential family,

Received: 9 November 2021 Revised: 18 November 2022 Accepted: 10 December 2022

DOI: 10.1002/pa.2850

J Public Affairs. 2023;23:e2850. wileyonlinelibrary.com/journal/pa © 2022 John Wiley & Sons Ltd. 1of15

https://doi.org/10.1002/pa.2850