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.