Political Connections and Financial Constraints: Evidence from Central and Eastern Europe

Ugo Panizza, Maurizio Bussolo, Francesca de Nicola and Richard Varghese

No 14126, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We examine whether political connections ease ï¬ nancial constraints faced by ï¬ rms. Using ï¬ rm-level data from six Central and Eastern European economies, we show that politically connected ï¬ rms are characterized by: (i) higher leverage, (ii) lower proï¬ tability, (iii) lower capitalization, (iv) lower marginal productivity of capital, and (v) lower levels of investment than unconnected ï¬ rms. Politically connected ï¬ rms borrow more because they have easier access than unconnected ï¬ rms to credit but tend to be less productive than unconnected ï¬ rms. Our results are consistent with the idea that political connections distort capital allocation and may have welfare costs.

Keywords: investment; Political connections; Corruption; Financial constraints (search for similar items in EconPapers)
JEL-codes: D22 O17 P12 P14 (search for similar items in EconPapers)
Date: 2019-11
New Economics Papers: this item is included in nep-pol and nep-soc
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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