The Value of Local Political Connections in a Low-Corruption Environment

Amore, Mario Daniele; Bennedsen, Morten

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The Value of Local Political Connections in a Low-Corruption Environment

Journal of Financial Economics (JFE), Forthcoming

47 Pages Posted: 11 Apr 2013 Last revised: 22 Jul 2013

See all articles by Mario Daniele Amore

Mario Daniele Amore

Bocconi University - Department of Management and Technology; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Morten Bennedsen

INSEAD - Economics and Political Sciences; University of Copenhagen - Department of Economics

Date Written: April 23, 2013

Abstract

We use exogenous changes in Danish local municipality sizes to identify a large positive effect of political power on the profitability of firms related by family to local politicians. Our difference-in-differences estimate is consistent with a unitary elasticity of connected firms' performance to political power (as measured by population per elected politician). Increasing power boosts firms' operating returns, especially in industries relying heavily on public demand. We confirm our main finding via several alternative models. Focusing on arguably the world's least corrupt country, we highlight the importance of corporate rent seeking at local governmental levels, which account for nearly half of total public expenditures.

Keywords: Political connections, Family ties, Rent extraction, Local politics

JEL Classification: G34, G38, D72, D73

Suggested Citation: Suggested Citation

Amore, Mario Daniele and Bennedsen, Morten, The Value of Local Political Connections in a Low-Corruption Environment (April 23, 2013). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2248451