Skip to main content
SpringerLink
Log in

The value of political connections in the post-transition period: evidence from Czechia

  • Published:
Public Choice Aims and scope Submit manuscript

Abstract

This paper studies the relationship between political connections and reported profits using a newly compiled dataset on all corporate donations to political parties in Czechia during its post-transition period (between 1995 and 2014). I develop a dynamic matching approach to identify non-connected firms that are similar to their connected peers on a range of observable characteristics, including profitability prior to becoming connected. I find that being politically connected is associated with superior reported profits: I estimate conservatively that the connected firms outperform their non-connected but otherwise similar competitors by 8–12% following the establishment of the connection, which is a larger effect than found previously for more developed economies. What is more important, however, I find that the effect virtually vanishes for non-connected firms aligned closely with the public sector. That evidence suggests that other forms of connections, such as personal ties and those established at subnational levels of government, such as regional and municipal governance tiers, are likely to have played a significant role in Czechia during its post-transition period.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Source: Author based on data from PolitickeFinance.cz

Fig. 2

Source: Author

Similar content being viewed by others

Notes

  1. The few papers that do rely on contributions to parties include the works that I reference above (Titl and Geys 2019; Boas et al. 2014; Baltrunaite 2020).

  2. For a thorough review of political financing in Czechia, see, for example, Simral (2015) and Skuhrovec et al. (2015).

  3. The laws changed in January 2017 when donations were capped at CZK 3 million per person (natural or legal) per year and limits on campaign spending were introduced.

  4. For example, likely the most widely used measures of institutional quality, the Worldwide Governance Indicators (see Kaufmann et al. 2011 for methodology), include an indicator of “Control of corruption”, which consistently places Czechia in the bottom ten of OECD countries.

  5. Cíl, akciová společ nost v Praze is a company owned entirely by ČSSD and its reported main aim is to print and publish or sell advertising materials. That company alone donated more than CZK 930 million to ČSSD over the examined time period.

  6. A different but related approach was taken by Boubakri et al. (2012a), who employ a two-stage regression model to, first, construct an instrumental variable estimating the probability of political connectedness of firms based on their locations, sizes and other firm-specific characteristics. In the second stage, they rely on that variable to estimate the effects of political connectedness. However, at least two reasons can be found for why that methodology is not suitable for the present case study of Czech data. First, the longitudinal character of our dataset does not permit the estimation of political connectedness based on firm characteristics because, for some firms, those characteristics vary significantly over time. Second, especially for an individual country study, that approach is not likely to resolve the endogeneity issue, since a brief look at the data reveals that better—performing firms are more likely to be larger in size, operate in relatively more capital—intensive industries, work closely with the public sector, and so on.

  7. That approach follows also from the notion that firms may view political campaign contributions as a form of short-term investment, as outlined, for example, by Hersch et al. (2008). As an illustration, let us suppose that a political donation made during 2010 is paid off by a public procurement contract signed in 2011 and completed in 2012. The full effect of that donation on profits is then reflected in the 2012 financial year. For the results presented herein, I rely on different time horizons as robustness checks (see below).

  8. The classification is somewhat tricky because the composition of the government changes following parliamentary elections (not on January 1). I consider a party as in power in year t if it was in the government for at least 6 months of year t.

  9. Although I do not explore the implications of that result here, one possible explanation consistent with economic theory is that firms operating in larger cities generally face more vigorous competition.

References

  • Acemoglu, D., Johnson, S., Kermani, A., Kwak, J., & Mitton, T. (2016). The value of connections in turbulent times: Evidence from the United States. Journal of Financial Economics, 121(2), 368–391.

    Article  Google Scholar 

  • Acemoglu, D., & Verdier, T. (2000). The choice between market failures and corruption. American Economic Review, 90(1), 194–211.

    Article  Google Scholar 

  • Adhikari, A., Derashid, C., & Zhang, H. (2006). Public policy, political connections, and effective tax rates: Longitudinal evidence from Malaysia. Journal of Accounting and Public Policy, 25(5), 574–595.

    Article  Google Scholar 

  • Aggarwal, R. K., Meschke, F., & Wang, T. Y. (2012). Corporate political donations: Investment or agency? Business and Politics, 14(1), 1–38.

    Article  Google Scholar 

  • Amore, M. D., & Bennedsen, M. (2013). The value of local political connections in a low-corruption environment. Journal of Financial Economics, 110(2), 387–402.

    Article  Google Scholar 

  • Ansolabehere, S., Snyder, J. M, Jr., & Ueda, M. (2004). Did firms profit from soft money? Election Law Journal, 3(2), 193–198.

    Article  Google Scholar 

  • Auriol, E., Straub, S., & Flochel, T. (2016). Public procurement and rent-seeking: The case of Paraguay. World Development, 77, 395–407.

    Article  Google Scholar 

  • Baltrunaite, A. (2020). Political contributions and public procurement: Evidence from Lithuania. Journal of the European Economic Association, 18(2), 541–582.

    Article  Google Scholar 

  • Banerjee, A. V. (1997). A theory of misgovernance. The Quarterly Journal of Economics, 112(4), 1289–1332.

    Article  Google Scholar 

  • Baturo, A., & Mikhaylov, S. (2016). Blair disease? Business careers of the former democratic heads of state and government. Public Choice, 166(3–4), 335–354.

    Article  Google Scholar 

  • Blau, B. M. (2017). Lobbying, political connections and emergency lending by the Federal Reserve. Public Choice, 172(3–4), 333–358.

    Article  Google Scholar 

  • Boas, T. C., Hidalgo, F. D., & Richardson, N. P. (2014). The spoils of victory: Campaign donations and government contracts in Brazil. The Journal of Politics, 76(2), 415–429.

    Article  Google Scholar 

  • Boubakri, N., Cosset, J. C., & Saffar, W. (2008). Political connections of newly privatized firms. Journal of Corporate Finance, 14(5), 654–673.

    Article  Google Scholar 

  • Boubakri, N., Cosset, J. C., & Saffar, W. (2012a). The impact of political connections on firms’ operating performance and financing decisions. Journal of Financial Research, 35(3), 397–423.

    Article  Google Scholar 

  • Boubakri, N., Guedhami, O., Mishra, D., & Saffar, W. (2012b). Political connections and the cost of equity capital. Journal of Corporate Finance, 18(3), 541–559.

    Article  Google Scholar 

  • Cingano, F., & Pinotti, P. (2013). Politicians at work: The private returns and social costs of political connections. Journal of the European Economic Association, 11(2), 433–465.

    Article  Google Scholar 

  • Claessens, S., Feijen, E., & Laeven, L. (2008). Political connections and preferential access to finance: The role of campaign contributions. Journal of Financial Economics, 88(3), 554–580.

    Article  Google Scholar 

  • Cooper, M. J., Gulen, H., & Ovtchinnikov, A. V. (2010). Corporate political contributions and stock returns. The Journal of Finance, 65(2), 687–724.

    Article  Google Scholar 

  • De Figueiredo, R. J. P. J., & Edwards, G. (2007). Does private money buy public policy? Campaign contributions and regulatory outcomes in telecommunications. Journal of Economics & Management Strategy, 16(3), 547–576.

    Article  Google Scholar 

  • Desmarais, B. A., La Raja, R. J., & Kowal, M. S. (2015). The fates of challengers in US house elections: The role of extended party networks in supporting candidates and shaping electoral outcomes. American Journal of Political Science, 59(1), 194–211.

    Article  Google Scholar 

  • Disdier, A. C., & Head, K. (2008). The puzzling persistence of the distance effect on bilateral trade. The Review of Economics and Statistics, 90(1), 37–48.

    Article  Google Scholar 

  • Dombrovsky, V. (2008). Do political connections matter? firm-level evidence from Latvia. Working Paper, Stockholm School of Economics in Riga and Baltic International Centre for Economic Policy Studies.

  • Duchin, R., & Sosyura, D. (2012). The politics of government investment. Journal of Financial Economics, 106(1), 24–48.

    Article  Google Scholar 

  • Faccio, M. (2006). Politically connected firms. American Economic Review, 96(1), 369–386.

    Article  Google Scholar 

  • Faccio, M., Masulis, R. W., & McConnell, J. (2006). Political connections and corporate bailouts. The Journal of Finance, 61(6), 2597–2635.

    Article  Google Scholar 

  • Fan, J. P., Wong, T. J., & Zhang, T. (2007). Politically connected CEOs, corporate governance, and post-IPO performance of China’s newly partially privatized firms. Journal of Financial Economics, 84(2), 330–357.

    Article  Google Scholar 

  • Ferguson, T., & Voth, H. J. (2008). Betting on Hitler: The value of political connections in Nazi Germany. The Quarterly Journal of Economics, 123(1), 101–137.

    Article  Google Scholar 

  • Fisman, R. (2001). Estimating the value of political connections. American Economic Review, 91(4), 1095–1102.

    Article  Google Scholar 

  • Goldman, E., Rocholl, J., & So, J. (2009). Do politically connected boards affect firm value? Review of Financial Studies, 22(6), 2331–2360.

    Article  Google Scholar 

  • Goldman, E., Rocholl, J., & So, J. (2013). Politically connected boards of directors and the allocation of procurement contracts. Review of Finance, 17(5), 1617–1648.

    Article  Google Scholar 

  • Grossmann, M., & Dominguez, C. B. (2009). Party coalitions and interest group networks. American Politics Research, 37(5), 767–800.

    Article  Google Scholar 

  • Hersch, P., Netter, J. M., & Pope, C. (2008). Do campaign contributions and lobbying expenditures by firms create “political” capital? Atlantic Economic Journal, 36(4), 395–405.

    Article  Google Scholar 

  • Jayachandran, S. (2006). The Jeffords effect. Journal of Law and Economics, 49(2), 397–425.

    Article  Google Scholar 

  • Johnson, S., & Mitton, T. (2003). Cronyism and capital controls: Evidence from Malaysia. Journal of Financial Economics, 67(2), 351–382.

    Article  Google Scholar 

  • Kaufmann, D., Kraay, A., & Mastruzzi, M. (2011). The worldwide governance indicators: Methodology and analytical issues. Hague Journal on the Rule of Law, 3(2), 220–246.

    Article  Google Scholar 

  • Khwaja, A. I., & Mian, A. R. (2005). Do lenders favor politically connected firms? Rent provision in an emerging financial market. The Quarterly Journal of Economics, 120(4), 1371–1411.

    Article  Google Scholar 

  • Kostovetsky, L. (2015). Political capital and moral hazard. Journal of Financial Economics, 116(1), 144–159.

    Article  Google Scholar 

  • Krueger, A. (1974). The political economy of the rent-seeking society. The American Economic Review, 64(3), 291–303.

    Google Scholar 

  • Leuz, C., & Oberholzer-Gee, F. (2006). Political relationships, global financing, and corporate transparency: Evidence from Indonesia. Journal of Financial Economics, 81(2), 411–439.

    Article  Google Scholar 

  • Li, H., Meng, L., Wang, Q., & Zhou, L. A. (2008). Political connections, financing and firm performance: Evidence from Chinese private firms. Journal of Development Economics, 87(2), 283–299.

    Article  Google Scholar 

  • Lin, M., Lucas, H. C, Jr., & Shmueli, G. (2013). Too big to fail: Large samples and the p-value problem. Information Systems Research, 24(4), 906–917.

    Article  Google Scholar 

  • Lízal, L., & Kočenda, E. (2001). State of corruption in transition: Case of the Czech Republic. Emerging Markets Review, 2(2), 138–160.

    Article  Google Scholar 

  • Miettinen, T., & Poutvaara, P. (2014). A market for connections. European Journal of Political Economy, 33, 37–52.

    Article  Google Scholar 

  • Miettinen, T., & Poutvaara, P. (2015). Parties as efficiency-improving gatekeepers in rent-seeking societies. European Journal of Political Economy, 38, 87–101.

    Article  Google Scholar 

  • Niessen, A., & Ruenzi, S. (2010). Political connectedness and firm performance: Evidence from Germany. German Economic Review, 11(4), 441–464.

    Article  Google Scholar 

  • OECD. (2013). Phase 3 Report on implementing the OECD anti-bribery convention in the Czech Republic, Technical report. Organization for Economic Cooperation and Development.

  • Palanský, M. (2014). Political connections and public procurement: Evidence from the Czech Republic. Mimeo.

  • Palguta, J., & Pertold, F. (2017). Manipulation of procurement contracts: Evidence from the introduction of discretionary thresholds. American Economic Journal: Economic Policy, 9(2), 293–315.

    Google Scholar 

  • Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The Journal of Finance, 50(5), 1421–1460.

    Article  Google Scholar 

  • Shleifer, A., & Vishny, R. W. (1994). Politicians and firms. The Quarterly Journal of Economics, 109(4), 995–1025.

    Article  Google Scholar 

  • Simral, V. (2015). Financování politických stran v Československu a České republice 1990–2015. Ph.D. Thesis, Faculty of Social Sciences, Masaryk University in Brno.

  • Skuhrovec, J., Titl, V., & Palanský, M. (2015). Analýza daru politickým stranám v České republice. In: Financování politického života, Munipress, Masaryk University in Brno.

  • Snyder, J. M. J. (1990). Campaign contributions as investments: The U.S. House of Representatives, 1980–1986. Journal of Political Economy, 98(6), 1195–1227.

    Article  Google Scholar 

  • Stark, D., & Vedres, B. (2012). Political holes in the economy: The business network of partisan firms in Hungary. American Sociological Review, 77(5), 700–722.

    Article  Google Scholar 

  • Titl, V., & Geys, B. (2019). Political donations and the allocation of public procurement contracts. European Economic Review, 111, 443–458.

    Article  Google Scholar 

  • Witko, C. (2011). Campaign contributions, access, and government contracting. Journal of Public Administration Research and Theory, 21(4), 761–778.

    Article  Google Scholar 

  • Wu, W., Wu, C., Zhou, C., & Wu, J. (2012). Political connections, tax benefits and firm performance: Evidence from China. Journal of Accounting and Public Policy, 31(3), 277–300.

    Article  Google Scholar 

Download references

Acknowledgements

Support from the Grant Agency of Charles University under Project GA UK No. 328215 gratefully is acknowledged. The present work has been supported by Charles University Research Centre Program No. UNCE/HUM/035 and has benefited from the H2020-MSCA-RISE project GEMCLIME-2020 GA No. 681228. I am grateful to William Shughart, Petr Janský, Evžen Kočenda, Jiří Skuhrovec, Vítězslav Titl, Vít Šimral, Petr Gongala, Jan Outlý, Michal Šoltés, Tereza Palanská, Martin Gregor, Felipe Gonzalez, Jan Mareš, anonymous referees, and seminar participants at Charles University and the University of Wroclav for their excellent comments and suggestions. Any remaining errors are mine. Code and data are available at http://miroslavpalansky.cz/research/connections-2020/.

Author information

Authors and Affiliations

  1. Institute of Economic Studies, Charles University, Prague, Czech Republic

    Miroslav Palanský

Authors
  1. Miroslav Palanský
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Miroslav Palanský.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Appendix

Appendix

See Tables 9, 10, 11, 12, 13, 14, 15, 16 and Fig. 3.

Table 9 Balancing properties of the samples of connected and non-connected firms, before and after matching
Full size table
Table 10 Results of a t-test, clustered at the party network level, of equal means of financial performance indicators for connected and non-connected (but otherwise similar) firms
Full size table
Table 11 Results of the pooled model with return on equity as the dependent variable, using different trimming and winsorization procedures, while using the preffered smoothing period t \(\rightarrow\) t + 2; OLS
Full size table
Table 12 Results of the pooled model with return on equity as the dependent variable, using different smoothing periods, while using the preffered trimming procedure at \(\langle -\,1,1\rangle\); OLS
Full size table
Table 13 Sensitivity analysis for the pooled model with return on equity as the dependent variable; OLS
Full size table
Table 14 Sensitivity analysis for the pooled model with return on assets as the dependent variable; OLS
Full size table
Table 15 Results of the pooled model which divides the sample into 5 quintiles based on the volume of public procurement supplied by firms within the same sector between 2006 and 2014
Full size table
Table 16 Results of the pooled models in the matched sample, OLS
Full size table
Fig. 3
figure 3

Source: Author

Histogram of the number of successful matches of non-connected firms to connected firms.

Full size image

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Palanský, M. The value of political connections in the post-transition period: evidence from Czechia. Public Choice 188, 121–154 (2021). https://doi.org/10.1007/s11127-020-00816-3

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11127-020-00816-3

Keywords

JEL Classification

Search

Navigation