Political Connections and Corporate Bailouts

Abstract

We analyze the likelihood of government bailouts of a sample of 450 politically-connected (but publicly-traded) firms from 35 countries over the period 1997 through 2002. We find that politically-connected firms are significantly more likely to be bailed out than similar non-connected firms. Additionally, politically-connected firms are disproportionately more likely to be bailed out when the IMF or World Bank provide financial assistance to the firm's home country. Further, among firms that are bailed out, those that are politically-connected exhibit significantly worse financial performance than their non-connected peers at the time of the bailout and over the following two years. This evidence suggests that, at least in some countries, political connections influence the allocation of capital through the mechanism of financial assistance when connected companies confront economic distress. It may also explain prior findings that politically-connected firms borrow more than their non-connected peers.

Keywords: Political connections, cronism, bailouts

JEL Classification: G3, G28, G30, G33