DP14126 Political Connections and Financial Constraints: Evidence from Central and Eastern Europe

• Maurizio Bussolo Francesca de Nicola Ugo Panizza Richard Varghese
16 Nov 2019

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) lower
capitalization, (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.