Institutional Constraints on the Value of Corporate Political Connections

Abstract

This paper examines the contingent financial value of corporate political connections and the strategic choice of firms to hold such connections in different institutional environments. I construct a novel dataset by linking (1) the names of top managers and board members from 6,805 public firms across 30 European countries; (2) information on public procurement contracts worth about €97.6 billion in Europe from 2009 to 2017; and (3) proprietary data on the identities of persons with political connections. Using a model with firm fixed effects to control for time-invariant firm heterogeneity and exploiting variation in the political connectedness of a firm’s managers and board members across time, I show that political connections increase the value of procurement contracts that firms win from government agencies. However, this value of political connectedness is moderated by stronger national institutions that enable different branches or entities of government to check one another’s power, with the model suggesting a €10.8 million difference in the effect of a political connection on procurement contracts between countries with the weakest and strongest of such institutions in 2017. Finally, I show that firms are more likely to hire and retain a politically connected manager or board member when these institutions are weaker. This paper answers calls to identify the value of corporate political connections across multi-country contexts and extends the empirical literature on nonmarket strategy by linking the institutional environment not only to financial value but also to personnel decisions.