The Half-Life of Political Capital: An Examination of the Temporal Effects of Political Connections

Abstract

The primary objective of this study is to examine the temporality of the effects of firms’ political connections. We use two separate DVs, persistence and volatility of firm performance. Using various sources, we constructed a panel data of over 5,000 firms located in 14 different countries. Our findings suggest that the effect of political connections lasts for around 6yrs. Besides, the effect is significantly positive only for above average performers. For others, though negative, the effect remains mostly insignificant. Furthermore, we find that legislative constraint on politicians has a very strong and negative moderating effect. We also find some evidence of negative moderating effect of political stability and efficiency of factor-market institutions. Our study makes a theoretical contribution by pointing out a firm-specific determinant of persistence and volatility, besides demonstrating that firms’ political connections could overcome ‘institutional voids’ of the business environment. For estimation of persistence, we used random coefficient modelling technique on a first order autoregressive equation AR(1). Our methodology allowed persistence estimates to vary by firm and by time, thereby removing a major limitation of prior research. Additionally, for precise causal identification, we resorted to statistical matching techniques.