Profitability of politically corrupt firms: Evidence from Romania

Extending the twin-agency problem model, this paper shows that political corruption affects firms by empowering the controlling shareholders and thereby intensifying agency conflicts within selected firms instead of simple political extractions. The fact that controlling shareholders of politically corrupt firms divert more resources from their firms explains the inferior accounting performance despite the well-documented benefits of political connections. Moreover, a higher degree of diversion does not result in a value discount due to the increased value of control. These are demonstrated by evidence from a unique series of political events in Romania in 2015. •Political corruption intensifies the agency problem.•Political corruption incurs overinvestment problem.•Overinvestment offsets the benefits derived from political connections.•The overinvestment problem explains the inferior ROA of connected firms•Due to the value of control, politically connected firms have superior valuation.