The Impact of Political Connections on Overinvestment and Firm Performance

Abstract

Objective: Overinvestment is a type of investment behavior that results from greater access to free cash flows. Usually, access to external resources is more in companies with strong political connections. Thus managers may influence the firm's performance by making decisions. Hence, the purpose of the present research is to investigate the effect of political connections on overinvestment and performance of the listed companies in the Tehran Stock Exchange. Methods: To achieve research goal 110 companies were selected and studied for the period of 2010-2016. A panel data approach was used to test the research of hypotheses. Results: The results show that political connections on overinvestment and firm performance has a positive and negative effect respectively. Conclusion: In fact, although political connections help firms obtain more financial resources, access to commercial loans derived from political connections could lead to oversupply of credit and increase financial burden. In addition, intervention from politicians may cause distortions in social resources allocation, which results in overinvestments and poor performance.

Keywords

• Political connections
• Overinvestment
• firm performance
• Return on assets
• Free cash flows