How Do Political Connections of Firms Matter During An Economic Crisis?

73 Pages Posted: 6 Apr 2022 Last revised: 27 Aug 2023

See all articles by Yutong Chen

Yutong Chen

University of Virginia - Department of Economics; University of Texas at Arlington - College of Business Administration - Department of Economics

Gaurav Chiplunkar

University of Virginia - Darden School of Business

Sheetal Sekhri

Department of Economics, University of Virginia

Anirban Sen

Microsoft Research

Aaditeshwar Seth

affiliation not provided to SSRN

Date Written: April 6, 2022

Abstract

We use a new machine learning-enabled, social network-based measurement technique to assemble a novel dataset of firms' political connections in India. Leveraging this data along with a long panel of detailed financial transactions of firms, we study how political connections matter during an economic downturn. Using a synthetic difference-in-differences framework, we find that connected firms had 8-10% higher income, sales, and TFPR gains that were persistent over three years following the crisis. We unpack various mechanisms and show that connected firms were able to delay their short-term payments to suppliers and creditors, delay debt and interest payments, decrease expensive long-term borrowings from banks in favor of short-term non-collateral ones, and increase investments in productive assets such as computers and software. Our method to determine political connections is portable to other applications and contexts.

Keywords: Political Connections, Firms, Demonetization

JEL Classification: O16, D22, D73, E51

Suggested Citation

Chen, Yutong and Chiplunkar, Gaurav and Sekhri, Sheetal and Sen, Anirban and Seth, Aaditeshwar, How Do Political Connections of Firms Matter During An Economic Crisis? (April 6, 2022). Darden Business School Working Paper No. 4058355, Available at SSRN: https://ssrn.com/abstract=4058355 or http://dx.doi.org/10.2139/ssrn.4058355

Yutong Chen

University of Virginia - Department of Economics ( email )

237 Monroe Hall
P.O. Box 400182
Charlottesville, VA 22904-418
United States

University of Texas at Arlington - College of Business Administration - Department of Economics ( email )

Box 19479 UTA
Arlington, TX 76019
United States

Gaurav Chiplunkar (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Sheetal Sekhri

Department of Economics, University of Virginia ( email )

P.O. Box 400182
Charlottesville, VA 22904-4182
United States

Anirban Sen

Microsoft Research ( email )

Redomond, WA 98052

Aaditeshwar Seth

affiliation not provided to SSRN

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