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

Abstract

We use a new machine learning-enabled, social network based measurement technique to assemble a novel dataset of firms’ political connections in India. Combining it with a long panel of detailed financial transactions of firms, we study how firms leverage these connections 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 for over a three-year period following the crisis. We unpack various novel mechanisms and show that connected firms were able to decrease expensive long-term borrowings from banks in favor of short-term non-collateral ones, increase borrowing from the government, delay their short-term payments to suppliers and creditors, delay debt and  interest payments, 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