Political connection, earnings volatility and short-term debt

Purpose Political connections introduce significant uncertainty in emerging markets and may shape firms' risk profiles by weakening market discipline and governance mechanisms. This study examines the association between political connections and earnings volatility in the Indian context. Additionally, it examines whether short-term debt can act as a moderator in mitigating the risk associated with political connections by reinforcing financial discipline and external monitoring. Design/methodology/approach Using an unbalanced panel of NSE-listed firms from 2009 to 2024, the study employs pooled ordinary least squares (OLS). The political connection is measured using a dual-channel approach, comprising both the promoter's channel and the donation channel. The political connection dataset for Indian firms was compiled from Election Commission of India contribution reports and the companies' annual reports. The results exhibit robustness to endogeneity concerns, which are addressed through instrumental variable estimation and a range of robustness tests. Findings The major findings of the study indicate that a firm with a political connection is positively and significantly associated with earnings volatility, suggesting that political connection exposes the firm to policy uncertainty, rent-seeking pressure and managerial opportunism. Short-term debt (STD) is found to reduce earnings volatility and negatively moderates the relationship between political connection and earnings volatility. This finding suggests that STD as an external governance by enhancing regular creditor monitoring. These findings align with agency theory and remain robust across alternative measures and endogeneity correction. Originality/value This study contributes to the literature by providing evidence on the risk implications of political connections in an emerging market setting and by highlighting the moderating role of STD in shaping earnings volatility in politically connected firms. The findings underscore the importance of debt maturity structure as an external governance mechanism in environments characterised by political influence.