Campaign Contributions and Firm Performance: The 'Latvian Way'

Abstract

This paper examines the effect of political connections on firm performance in Latvia, using a unique dataset that allows identifying the universe of all firms that made campaign contributions directly, through their board members, or shareholders. To address endogeneity issues, it employs a quasi-experiment provided by the 2002 elections, when the country’s most powerful political party at that time, the ‘Latvian Way’, failed to get re-elected in a way that was widely unanticipated. This paper finds that departure of the ‘Latvian Way’ caused its connected firms to lose, on average, 24 percent of their revenue in the after-election year, as compared with both firms connected to other parties, and control group of non-connected firms. The magnitude of the effect is positively correlated with the size of campaign contribution. Also, the paper finds that firms connected to the ‘Latvian Way’ only, i.e. those that did not diversify their campaign contributions, experienced decrease in after-election revenue by, on average, 30 percent, as compared to other connected and non-connected firms.

Keywords: quasi-experiment, campaign contributions, politically-connected firms, rent-seeking, Latvia

JEL Classification: D72, P26, P27