Impact of Corporate Political Connections and Audit Quality on Agency Cost: Evidence From Pakistan

Abstract

This study examines the impact of corporate political connections and audit quality on agency cost using Pakistani listed non-financial firms from 2010–2015. In Pakistan's weak institutional framework, politically connected firms receive benefits such as tax relief, low-interest loans, and policy information but incur high agency costs due to political payments. Agency cost is measured through asset utilization ratio, while audit quality is assessed through Big4 auditors, audit report lag, auditor independence, audit committee meeting frequency, and auditor expertise. Using generalized least squares, fixed effects, and dynamic regression analysis, the findings reveal that political connections increase agency costs, while audit quality mitigates these costs and acts as a substitute for traditional governance mechanisms. Older and larger firms are more politically connected, leverage reduces agency costs, and politically connected firms exhibit lower growth rates.

Keywords: Agency cost, Audit quality, Political connections, Asset utilization