Why Corporate Political Connections Can Impede Investment

Abstract

In this experiment, we manipulate corporate political connections to assess whether a company’s political influence serves as a barrier or an inducement to investment. We utilize survey data from 3329 firm employees and managers across Venezuela, Ukraine, and Egypt. Overall, our findings suggest that respondents generally prefer not to invest in companies with political connections. Interestingly, this aversion is conditional on the respondent’s company’s own level of political connection: individuals from highly connected companies do not penalize connected companies as investment choices. In contrast, those from less-connected companies are inclined to invest in companies without political connections. We theorize that this pattern is rooted in differences in how companies with varying levels of connections manage liabilities. Our data reveal that connected companies are more likely to employ informal, rather than formal, mechanisms to resolve disputes. We argue that unconnected investors likely prefer investing in unconnected companies to better ensure that their property rights are safeguarded.