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How Do Political Connections of Firms Matter during an Economic Crisis?

Author

Listed:
  • Chen, Yutong

    (University of Virginia)

  • Chiplunkar, Gaurav

    (University of Virginia)

  • Sekhri, Sheetal

    (University of Virginia)

  • Sen, Anirban

    (Microsoft Corporation)

  • Seth, Aaditeshwar

    (Indian Institute of Technology Delhi)

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 for over a three-year period 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.

Suggested Citation

  • Chen, Yutong & Chiplunkar, Gaurav & Sekhri, Sheetal & Sen, Anirban & Seth, Aaditeshwar, 2023. "How Do Political Connections of Firms Matter during an Economic Crisis?," IZA Discussion Papers 16131, Institute of Labor Economics (IZA).
  • Handle: RePEc:iza:izadps:dp16131
    as

    Download full text from publisher

    File URL: https://docs.iza.org/dp16131.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    political connections; firms; crisis;
    All these keywords.

    JEL classification:

    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption

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