The effect of political connections on firm performance: evidence from Egypt

This paper examines the effect of political connections (PCs) on firms' profitability and market value in the Egyptian market after the uprising of 2013.

An empirical study is conducted based on 284 firm-year observations for non-financial listed firms on the EGX100 during the period of 2014–2017. To test the study’s hypothesis, two independent sample t-test, Pearson correlation analysis and ordinary least square (OLS) regressions are conducted.

The results suggest that PCs are common across all industries in Egypt, the PCs through top officers do not improve firm's profitability; however, it has a positive effect on firms' market value. Further, PCs through business owners improve neither profitability nor the market value. Finally, the results suggest that PCs through government ownership have a positive effect on both firms' profitability and market value.

The study’s finding encourages policymakers and regulators in emerging markets, e.g. Egypt, to develop stricter laws, policies and regulatory initiatives to restrain the potential conflict of interest in the politically connected firms.

To the best of the authors' knowledge, this study is one of the first to examine the relationship between PCs and both firms’ profitability and market value in Egypt.