Corporate governance dynamics of political tie formation in emerging economies: Business group affiliation, family ownership, and institutional transition

Abstract Research Question/Issue Despite the importance of political ties to firm strategy and performance, little is known about why and how firms form political ties. This study examines how firm‐specific governance structures function as important determinants of the formation of political ties and how the impact of governance structures evolves during institutional transition of emerging economies. Research Findings/Insights Our empirical analysis is based on a longitudinal data set involving manually coded political ties of listed firms in Taiwan between 1996 and 2005. We find that business group affiliation and family ownership facilitate the formation of political ties but that such effects diminish as market infrastructures and regulatory institutions develop. Theoretical/Academic Implications This study systematically examines how corporate governance structures affect the formation of political ties. It identifies an overlooked explanation for the dynamics of political ties that resides in the internal governance structures of firms. It contributes to the corporate governance research by demonstrating how governance structures other than the board of directors can provide resources to facilitate strategic actions such as political tie establishment. It also enriches research on corporate governance bundles by showing the interdependence among multilevel governance mechanisms in the context of political tie formation. Practitioner/Policy Implications This study offers insights for business executives interested in managing interdependence with government. While business group affiliates and family firms are better able to link to politicians, such advantages diminish during institutional transition. Hence, group leaders and family owners should consider other political activities to effectively manage political risks as institutions develop.