How Do Political Connections of Firms Matter during an Economic Crisis?

Yutong Chen (), Gaurav Chiplunkar (), Sheetal Sekhri, Anirban Sen () and Aaditeshwar Seth ()
Additional contact information
Yutong Chen: University of Virginia
Gaurav Chiplunkar: University of Virginia
Anirban Sen: Microsoft Corporation
Aaditeshwar Seth: Indian Institute of Technology Delhi

No 16131, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: We use a new machine learning-enabled, social network based measurement technique to assemble a novel dataset of firms' political connections in India. Leveraging this data along with a long panel of detailed financial transactions of firms, we study how political connections matter during an economic downturn. Using a synthetic difference-in-differences framework, we find that connected firms had 8-10% higher income, sales, and TFPR gains that were persistent for over a three-year period following the crisis. We unpack various mechanisms and show that connected firms were able to delay their short-term payments to suppliers and creditors, delay debt and interest payments, decrease expensive long-term borrowings from banks in favor of short-term non-collateral ones, and increase investments in productive assets such as computers and software. Our method to determine political connections is portable to other applications and contexts.

Keywords: political connections; firms; crisis (search for similar items in EconPapers)
JEL-codes: D22 D73 O16 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2023-05
New Economics Papers: this item is included in nep-big, nep-net and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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