Working Paper: CEPR ID: DP14126
Authors: Maurizio Bussolo; Francesca De Nicola; Ugo Panizza; Richard Varghese
Abstract: We examine whether political connections ease financial constraints faced by firms. Using firm-level data from six Central and Eastern European economies, we show that politically connected firms are characterized by: (i) higher leverage, (ii) lower profitability, (iii) lowercapitalization, (iv) lower marginal productivity of capital, and (v) lower levels of investment than unconnected firms. Politically connected firms borrow more because they have easier access than unconnected firms to credit but tend to be less productive than unconnected firms. Our results are consistent with the idea that political connections distort capital allocation and may have welfare costs.
Keywords: Investment; Political Connections; Corruption; Financial Constraints
JEL Codes: D22; O17; P12; P14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political connections (D72) | Higher leverage (G19) |
| Political connections (D72) | Lower profitability (D22) |
| Political connections (D72) | Lower marginal productivity of capital (D24) |
| Political connections (D72) | Easier credit access (G21) |
| Easier credit access (G21) | Lack of correlation between cash flow and investment (G31) |