Do Political Connections Matter? Firm-Level Evidence from Latvia

New SSE Riga/BICEPS research paper by V. Dombrovsky (BICEPS, SSE Riga).

Abstract. This paper examines the effect of political connections on firm performance. It draws on the universe of all registered firms in Latvia to construct a unique dataset of firms connected to politicians in 1996 to 2005. This paper shows that the effects of connections to politicians vary depending on the type of connection. Using fixed effects framework, it finds that firms that acquire politicians as their shareholders or board members experience a drop in the sales by 40%, followed by an increase in sales by 75% in the following year. This finding suggests that politicians join the firms in distress and help with political favors. However, this paper finds no effect from changes in the strength of political connections caused by changes in the ruling coalition. It also finds that connection with ex-politicians has no effect on firm performance.