Do Political Connections Matter? Firm-Level Evidence from Latvia

Abstract:     
This paper uses a unique hand-collected dataset of Latvian firms connected to politicians in 1996 to 2005 to examine the effect of political connections on firm performance. Using fixed effects framework, it reports the following findings. First, firms with connections to ex-politicians experience a 24% increase in revenue when ex-politician’s party is in the ruling coalition. Second, in the year of establishing connection with a politician, firms suffer a 34% drop in revenue, followed 63% increase in the following year. Third, in the year when politician’s party moves from the ruling coalition to opposition, connected firms suffer a 17% drop in revenue. Fourth, surprisingly, over the whole 1996-2005 period, firms connected to politicians do not outperform non-connected firms, whereas firms connected to ex-politicians substantially underperform non-connected firms. Generally, the findings suggest that firms seek political connections in response to a large adverse shock to their revenue.

Number of Pages in PDF File: 40

Keywords: politically connected firms, rent seeking, Latvia

JEL Classification: D72, P26

working papers series