Nexus of Political Connections with Green Finance and Financial Performance

Journal of Environmental Treatment Techniques

2021, Volume 9, Issue 1, Pages: 305-309

J. Environ. Treat. Tech.

ISSN: 2309-1185

Journal web link: http://www.jett.dormaj.com

https://doi.org/10.47277/JETT/9(1)309

Nexus of Political Connections with Green Finance

and Financial Performance

Rabia Najaf , Khakan Najaf

Taylor’s University, No 1. Jalan Taylor’s, 47500 Subang Jaya, Selangor, Malaysia

Received: 21/09/2020

Accepted: 23/11/2020

Published: 20/03/2021

Abstract

One of the most crucial aspects of the business environment is interaction with the government. Government entities have more

chances to gain their gratifying targets for secular growth, monumental work, and sustainable development. We are trying to determine

whether political connections are valuable for green corporate finance and corporate performance. Based on the prior literature,

political ties have better sustainable development priorities and financial performance than non-politically connected firms. It is

because they have sufficient resources to protect the natural environment, which eventually enhances financial performance. Our

findings corroborate with the stewardship theory that states the empowered board is a better decision-maker. Our study has

considerable implications for the research as it will enhance the knowledge about political ties.

Keywords: Government entities, Accusations, Gratifying targets

of the most crucial resources for firms [13]. Thus, this study

Introduction

is focusing on the impact of political ties on corporate

environmental performance. It is an important issue, as many

studies are uncertain about the underlying relationship

between them. Some studies argue that political connections

foster environmental responsibility, and some assert that

political ties hinder it [30], whereas others assert that

politically connected companies tend to evade environmental

regulations and have less environmental investment due to

government asylum [50; 51]. This contradiction of studies

leads us to the following question: Do political connections

strengthen or weaken corporate environmental performance?

Most of the studies documented that political

associations are prevalent for firm performance [2; 3; 10; 14;

The nexus among politician allies and corporations are

known as well-defined phenomena all over the world. Most

studies delineate that these connections are generally

valuable to boost green finance and firm values [8; 16] .

Political connections have a role in raising the interest of

public opinion. This issue is significant as the shareholders

have interest in listed firms and the relationship with the

political ties may strengthen or prejudice the corporation

growth. The political connetions association with green

finance and corporate performance is imperative for the

escalation of firms’ goals. The government linked firms are

known as the financial hub of all the markets [2; 4; 10; 14;

7; 21; 32]. In this study, we examined the intervening effect

32). Importantly, politicians have close links with business

of political ties on green investment of the firms, and the

corporate performance. We provide a comprehensive look at

the corporate political connections with respect to the prior

literature. Following the prior premises [15; 35; 49], we

address a central research question:

connection strengthen the green finance and corporate

performance?

through conferring favors such as privileges enshrined,

contract rewards, and financial resources. The large

corporations are interested in devoting their massive

resources to the political system. It is because democracy is

will a political

overgrowing, which has influenced corporate performance

[18]. According to the resource dependency theory, external

resources ultimately boost firm performance [3]. Mention

previous studies prove that political connections are known

as the significant avenues of burgeoning the corporation

performance. Genuinely, these corporations are overhauling

other firms due to their performance. A group of investors is

unanimous in investing such sort of corporations. They are

making a restricting plan and bring suable changes for the

incredible development of the entity and renders different

cautions to avoid the losses [42]. It is a suitable source to rein

the risk of losing growth. Ultimately, the advantages

ultimately can enhance corporation efficiency.

In the context of green development, significance has

been given to environmental responsibility from all the listed

sectors; especially it is true in terms of industrial sectors [27].

World Health Organisation (WHO) and many other social

service organisations have forced all listed firms to

implement green investment strategies, with an exceptional

increase in demand of stakeholders’ environmental

protection, meanwhile achieving corporate performance [20].

Political ties may significantly affect the firms’ behavior and

performance. Political connections are considered to be one

Corresponding author: Rabia Najaf, Taylor’s University,

No 1. Jalan Taylor’s, 47500 Subang Jaya, Selangor,

A system of government by the whole population or all the eligible

members of a state, typically through elected representatives.

Malaysia. Email: Rabianaajf@gmail.com

Journal of Environmental Treatment Techniques

2020, Volume 8, Issue 4, Pages: xxx-xxx

As discussed before, hundreds of companies hire

legislative members to escalate their revenue streams and

consolidate the business through external resources. In the

corporate world, such connections are recognized by the

name of assets of the company. Arguably, building political

connections are valuable for the corporation because they are

share market anticipates [41]. To give better insight into the

nature of political connections and illuminate the significant

root, it is essential to understand why and how political

connections impact firm performance. Political connections

left their spectrum on corporate performance [2]. To sum up,

all these shreds of evidence prove that political connections

have a positive and negative impact on firm performance.

The remainder of the paper is as follows. Section 2

reviews the literature. Section 3 elaborates the prior literature

into the discussion, and section 4 concludes the study.

Zhang et al., (2019) [51] also found that after incorporating

environmental protection into the official assessment system,

companies with political connections have increased their

environmental investment. In conclusion, from the green

finance perspective, if a firm is with governmental linked

even then, they have to undertake the escape environmental

responsibility.

2.2 Political connections and firm performance

The characteristics of a firm evolve gradually from the

start-up to a small business entity, and then finally to an

initial public offering that turns the entity into a corporate

firm with the inclusion of public shareholdings. The small

business entity usually establishes by an individual or a

family before becoming a corporate firm. As the family

business grows, it faces new challenges at the different stages

of business expansion [40], e.g., sourcing additional capital

and acquiring business opportunities. The privatization of

public, commercial entities is another way a firm gets linked

with the political group. Given growth of a firm, a political

connection provides an advantage in facing the challenges of

the business growth of small firms owned by the family [46].

Therefore, the members often get involved in politics and

take membership in the political parties; thus, many family

firms' founders are politically connected.

Literature Review

.1 Political connections and Green Finance

A significant amount of the studies have supported the

evidence of a positive association between political ties and

green finance. David & Sinclair-Desgagné (2010) [12]

suggest that access to green investment can be achieved

through political links. It is worth noting that the politically

connected firms have easy access to the financial incentives

which expand their environmental performance and

facilitates to implementation of government environmental

policies [44]. As per the resource dependence theory, Lin et

al., (2015) [30] suggested that the politically connected firms

are able to achieve more significant green finance due to the

accessible resources. Following the same premises, Wang et

al., (2018) [44] posited that the politically connected firms

have a positive linkage with green finance. It is because the

political connections are motivated to employ green practices

and have received critical resources through political links.

Thus, firms with political connections have better

environmental performances.

In contrast, many studies have articulated that political

linkages and green finance are adversely correlated. For

example, a seminal work of Morgan (2013) [34] pointed out

that the closer the association with the government ties, the

enterprises will evade more emissions. Further, they argued

that since the Government provides their associate firms

protection from the law, therefore they will like to perform

negatively towards the environmental responsibilities. In

addition, evidence shows that the politically connected firms

are more enthusiastic about poor ecological performance [9],

which provides support for the negative relationship between

political connections and environmental performance.

From the above-mentioned studies, it is clear that the

studies have a different point of view about the green

development trend and political ties. Nowadays, the

governments of under-developing countries are also playing

a significant role in promoting green finance. While taking

parameters for the development of gree finance, governments

around the world have started to take steps to downgrade

pollution [33]. The Government's series of related measures

include initiating green initiatives, introducing green

technology, and even directly integrating environmental

management into the national development planning and the

national project [38]. Also, Government introduces Green

GDP, and several other environmental protection policies are

applied to fulfill their ecological responsibilities [29]. In this

regard, it seems unlikely that the Government will indulge

related firms in evading their environmental responsibility.

The associations between firms and politicians are

common phenomena in all over the world. Most of the

studies exhibit that political connections positively impact

firms' value, and politically connected firms have accounted

for a considerable percentage of the world stock market [5;

22]. Second, close ties with the government can control

market failure to avoid ideological discrimination but

privatized firms cannot handle all these tasks [39]. Many

founders of the firms are politically connected, and they like

to appoint the second generation as directors [36], so this

thing will be economically significant and reduce the transfer

cost. Different approaches prove that politically connected

firms have more access to long-term financing, then non-

connected firms. There is the existence of political

connections that have to impact firms' performance in India.

After the rigorous study, it is safe to assume that political

connection has influenced stock prices [21]. It is because of

the involvement in corruption, most of the political leaders

are not able to work with firms. Similarly, there is found a

positive relationship between political connections and

access to short-term loans [48].

The empirical studies emphasis that politically connected

firms can access more efficiently easily than non-political

connected firms. Political connections are known as a

widespread phenomenon in all over the world. It is because

the politically connected networks gain various preferential

treatments like lax regulations, bank financing, and

government bailouts [17]. The efficiency of firms has heavily

influenced these treatments. Most studies prove that there is a

significant relationship between leverage and political

connections. There are positive associations between market

to book ratio and leverage [22]. So, politically connected

firms can enjoy high leverage compared to other firms, and it

has a significant effect on firms' efficiency. To sum up, it is a

significant channel to improve the firm's performance. On the

other side, there is a positive as well as a negative impact on

the firm s performance that is given below.

In the business world, the corporation facing several

threatens regarding their survival. It is also that there is a

mixed effect of political connections on corporation

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2020, Volume 8, Issue 4, Pages: 305-309

performance. In recent years, widespread political

connections have generated substantial empirical literature

concerning the impact of political connections on its

performance [28]. Most of the studies prove that political

connections are known as two sword edges as it has both

positive and negative effects. In some countries, there is

more threat of political extraction [6]. Therefore, firms did

not keep their assets in liquid shape, and they try best to save

their assets from political extractions. Most private

ownership prefaces efficient resource allocation rather than

political controls because political members seek extra

benefits from private shareholders. In such circumstances,

more connections with political members can detriment the

firm's value.

benefits like tax advantages. These are the factors that have a

key role in enhancing firms' profit efficiency [1].

There is ample evidence which proves that politically

connected firms have a lot of agency problem due to their

influence. It hurts efficiency because, in such firms, there is a

lack of motivation between managers and employees [37]. In

the corporate world, for the nurturing of firms, there is a need

to enhance the cost-efficiency. These are some plausible

evidence that proves that cost efficiency has a crucial role in

promoting the entities. Politically connected firms have low-

cost efficiency as compared to others because they incur high

labor costs.

In the business world, operational efficiency can be

measured based on more output. There is a need for the right

combination of employees, new technology, and processes to

improve operational efficiency. To boost the performance of

the company, the management should be skill and efficient.

Political members have the worst impact on the operation

efficiency of peers. The reason beyond that they are busy

enhancing their income rather than the firm's operations.

There is a lack of internal communications in non-politically

connected firms due to their influence [43].

.3 Other financial benefits of political connections

The politically connected firms are establishing a high

level of unemployment and substantial fiscal deficits in a

region. In particular, the firms with more political

connections make such type of strategies, which are not

favorable for the development of corporations like

maximization the employment level at the expenses of

shareholders with more political connections make such type

of strategies [45] and development of firms like

maximization the employment level at the expenses of

shareholders. Similarly, political members have the base

focus on their political agendas rather than firms'

performance [26]. In summise, with increasing PC index, the

firm's value starts decreasing.

In fewer developing countries, political connections are

more prevalent. It has the worst impact on foreign direct

investment, known as the main determinate of progress.

Therefore, it is seen that there is a negative association

between political connections and firms' performance. A

growing literature document that political associations

provide a valuable source to firms for the nurturing of firms.

Political connections are more prevalent in a well-developed

financial market like the US [28], and their shareholders are

seen well protected. Politically connected firms have a larger

market share [24], pay low taxes [25], and have more credit

access than other firms [7]. The politically connected firms in

the high develop country impose their elections expenses to

their shareholders. These expenses are influenced by

corporate performance. In the end, it is proved that in some

situations, political connections have a positive and negative

impact on the corporation performance.

They do not give incentives to competent persons while

giving incentives for employees who have

a close

relationship with the government. It is because of the low

morale of employees firms efficiency move towards

downward. For the development of business, there is a need

for a positive culture. There is a conflict between political

members and other employees due to their behavior. They do

not take an interest in the documents activates and maintain

the stander of the corporation because they are engaged in

their political agenda. Politically connected firms exert a

negative impact on operational efficiency because they incur

a large amount of labor cost as compared to other peers [47].

Due to political instability, there are more chances of errors

in calculations; therefore, these connections harm firm

efficiency [11]. Most of the studies examine that strength of

political members has influenced the firm efficiency.

Political allies are more confidence regarding take the

decision about firms rather than other firms. They can make

resource allocation decisions in a very smooth way. It has a

positive impact on the efficiency of firms. Multiple political

connections hurt corporate performance. Often, these

connections give the indicator of financial fragility. They

produce products on the desire of politicians, not based on

customers' desires. Therefore, it has the worst influence on

the growth of firms. All this evidence shows that it hurts the

performance of firms. To sum up, all this evidence proves

that these associations hurt the operational efficiency of

firms.

Most studies demonstrated that peers could achieve their

goals after enhancing profit. The crucial target of the firm is

to maximize profit. Profit enhancement is known as one of

the effective channels through which a corporation can

become more efficient. Politically connected firms have high

profits due to their external links. Politically connected firms

are more likely involved in enhancing the profit of firms,

including adequate resources and subside. In a competitive

market, a politician can beat their rivals due to their

influence. In a developed country like China, its leaders

provide plenty of capital, funds, and foreign investments. It is

well recounted that political connections are indicators for

investors. Due to government backup, investors want to

Discussion

The nexus between government and business is

considered as the most intense public debate in this era. In

the context of business, operational efficiency can be

measured based on high stock returns. For all corporations,

employees are known as more useful assets. It is known as a

more vital part of any corporation. There is a negative

association between politically connected firms and

operational efficiency due to unnecessary employment [19].

Most studies demonstrated that peers could achieve their goal

after enhancing the profit efficiency. The crucial target of the

firm is to maximize profit. Firm efficiency is one of the

effective channels through which a corporation can become

more efficient. There is various evidence that the government

can increase the firm's profit efficiency by providing

preferential regulations, additional contracts, and additional

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2020, Volume 8, Issue 4, Pages: xxx-xxx

invest a huge amount in such firms. In this way, they are

engaged to expand the profitability of firms. So, these shreds

of evidence prove that political links have a significant

impact on efficiency.

The influential leader refers to evaluating the

corporation's efficiency to determine the performance in the

market. Most firms use this efficiency to measure the

benefits, costs, and analysis of the different investment

projects. In these Asian countries, the company can decide

which project is more useful for further investment. In the

corporate world, for the nurturing of firms, there is a need to

enhance efficiency.

because the managerial cost is high rather than benefits.

Some other factors like corruption, low morale of employees,

rent-seeking benefits, and overinvestment negatively

influences the firm's environmental performance [32].

Finally, all these evidence prove that political connections

have both positive and negative impact on corporate

performance.

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