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