Research

Political Connections and Firm Performance: The Latvian Way


Year:
2008
Organization:
BICEPS


This paper examines the effect of political connections on firm performance. I draw on the universe of all registered firms in Latvia to construct a unique dataset of firms connected to politicians in 1996 to 2005, and firms that contributed in the 2002 elections.

This paper shows that the effects of connections to politicians vary depending on the type of connection. Using fixed effects framework, I find that firms establishing connection to a politician experience sharp drop in performance in this year, followed by rapid recovery.

Using unanticipated change in the ruling coalition following the 2002 election, I find that Latvian firms that provided contributions to the winning parties experienced better performance compared with those that did not, in the year after the election. Firms that provided contributions to the losing parties experienced worse performance as compared to firms that did not contribute. This suggests that direct connections to politicians and campaign contributions help firms benefit from firm-specific political favors.

This paper examines the effect of political connections on firm performance. I draw on the universe of all registered firms in Latvia to construct a unique dataset of firms connected to politicians in 1996 to 2005, and firms that contributed in the 2002 elections. This paper shows that the effects of connections to politicians vary depending on the type of connection. Using fixed effects framework, I find that firms establishing connection to a politician experience sharp drop in performance in this year, followed by rapid recovery. Using unanticipated change in the ruling coalition following the 2002 election, I find that Latvian firms that provided contributions to the winning parties experienced better performance compared with those that did not, in the year after the election. Firms that provided contributions to the losing parties experienced worse performance as compared to firms that did not contribute. This suggests that direct connections to politicians and campaign contributions help firms benefit from firm-specific political favors.

Political Connections and Firm Performance: The Latvian Way

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