Politically-Connected Firms: Can They Squeeze the State?

Abstract

For a sample of 42 countries, I examine firms whose controlling shareholders and top managers are members of national parliaments or governments. I find that this overlap is quite widespread, especially in highly corrupted countries. Connected companies enjoy easier access to debt financing, lower taxation, and stronger market power. These benefits increase when companies are connected through their owner, with a minister, or a seasoned politician. Furthermore, these benefits are generally larger when the firm operates in a country with high corruption, low protection of property rights, a highly interventionist government, or a non-democratic government. Even though these connections provide significant benefits, connected firms under-perform their peers on an ex-ante basis. Therefore connections, by driving benefits to relatively poorly performing firms, distort the allocation of funds and investment decisions.