Political Connections and Financial Constraints: Evidence from Transition Countries
32 Pages Posted: 7 Aug 2019
Date Written: August 6, 2019
This paper examines whether political connections ease financial constraints faced by firms. Using firm-level data from six Central and Eastern European economies, the paper shows that politically connected firms: (i) have high levels of leverage, (ii) have low levels of profitability, (iii) are less capitalized, (iv) have low marginal productivity of capital, and (v) do not invest more than unconnected firms. Next, the paper shows that connected firms borrow more because they have easier access to credit and that political connections lead to a misallocation of capital. The results are consistent with the idea that political connections distort capital allocation and may have welfare costs.
Keywords: Economics and Finance of Public Institution Development, State Owned Enterprise Reform, Economic Theory & Research, Economic Growth, Industrial Economics, Financial Regulation & Supervision, De Facto Governments, Public Sector Administrative & Civil Service Reform, Public Sector Administrative and Civil Service Reform, Administrative & Civil Service Reform, Democratic Government, Armed Conflict
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