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

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

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.

Suggested Citation

  • Panizza, Ugo & Bussolo, Maurizio & de Nicola, Francesca & Varghese, Richard, 2019. "Political Connections and Financial Constraints: Evidence from Central and Eastern Europe," CEPR Discussion Papers 14126, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14126
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    More about this item

    Keywords

    investment; Political connections; Corruption; Financial constraints;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • P12 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Enterprises
    • P14 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Property Rights

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