Abstract:
This paper examines how political connections affect the financial constraints of Pakistani firms and how they are related to firm performance. Using panel data of the listed Pakistani firms over the 2006-2015 period, our instrumental variable estimations show that in Pakistan formal political connections affect significantly firm financial status: politically connected firms are less financially constrained. The results are consistent across various measures of financial status. We find, however, evidence that politically connected firms perform worse than unconnected firms. The results are robust to three different measures of firm performance. We also find some evidence that the effects of political connections on firm performance vary across groups of Pakistani firms by financial status. Our results suggest financial resource misallocation in Pakistan consistent with the soft budget constraint theory.