Abstract

This study investigates the impact of political connections on the awarding of government contracts to Canadian companies. Two-stage least squares (2SLS) analyses were performed on a sample of S&P/TSX companies from 2010 to 2014 inclusively. The results show that political connections are positively and significantly associated with the winning of government contracts. Politically connected firms obtain more government contracts and higher contract values than non-connected firms. Political connections thus appear to be directly associated with securing government contracts in the Canadian context. Firms can view political connections as a non-market, long-term strategy to help them gain competitive advantages and improve their performance. Accordingly, they tend to appoint directors and managers taking these connections and the advantages that can be gained into account. However, they must seriously consider the cost-benefit ratio of this strategy. For example, the costs incurred could be ethical in nature and firms could find themselves in a position of conflict of interest that could lead to extensive negative media exposure. These results alert regulatory and governmental organizations to the need for them to remain vigilant and to strengthen corporate governance regulations to prevent the excesses and abuses that could arise from firms’ political actions. Our study is the first to demonstrate a direct relationship between corporate political connections and government contracts in the Canadian context. The results confirm the growing interdependence between politics and business, particularly the increase in the number of corporate actions intended to influence government decisions.

This work is licensed under a Creative Commons Attribution 4.0 License.