The Value of Political Connections in the Post-Transition Period: Evidence from the Czech Republic

Miroslav Palansky

No 2018/13, Working Papers IES from Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies

Abstract: This paper analyzes a novel data set on all corporate political donations made in a post-transition country, the Czech Republic, between 1995 and 2014. Using these donations as a proxy for political connections, I assess the relationship between being connected to a political party and the financial performance of the connected firms. In line with the theoretical predictions, I find that firms successfully use political connections to gain advantage over their non-connected peers. The results show that connected firms perform significantly better in the years around the establishment of a connection, and that the effect is stronger for firms that work closely with the public sector. Furthermore, I present evidence that firms that donations seem to represent actual measures of the level of connectedness, and firms that have contributed more outperform other connected firms. I then develop a dynamic approach to match connected firms with their non-connected but otherwise similar peers and conservatively estimate that being politically connected is associated with 20 to 30 % higher profitability than that of non-connected firms. I also find that non-connected firms that receive public money perform similarly to connected firms, suggesting that other sources of connections, such as personal ties, have played a significant role during the post-transition period in the Czech Republic.

Keywords: political connections; political donations; firm performance; rent-seeking (search for similar items in EconPapers)
JEL-codes: D22 D72 H7 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2018-08, Revised 2018-08
New Economics Papers: this item is included in nep-soc and nep-tra
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