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

Author(s): Maurizio Bussolo, Francesca De Nicola, Ugo Panizza, Richard Varghese
Publication Date: November 2019
Keyword(s): Corruption, Financial constraints, investment, Political Connections
JEL(s): D22, O17, P12, P14
Programme Areas: Public Economics, Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14126

We examine whether political connections ease fi?nancial constraints faced byfi?rms. Usingfi?rm-level data from six Central and Eastern European economies, we show that politically connected fi?rms are characterized by: (i) higher leverage, (ii) lower pofi?tability, (iii) lower capitalization, (iv) lower marginal productivity of capital, and (v) lower levels of investment than unconnected fi?rms. Politically connected fi?rms borrow more because they have easier access than unconnectedfi?rms to credit but tend to be less productive than unconnected fi?rms. Our results are consistent with the idea that political connections distort capital allocation and may have welfare costs.