The Relationship between Political Connections and the Financial Performance of Industries and Firms

Political connections are good for corporate executives, but not necessarily for their businesses. The US federal government’s response to the financial crisis was an unprecedented increase in government subsidies, grants, and contracts given directly to specific private businesses. The terms “crony capitalism” and “cronyism” are now widely used to describe the modern relationship between government and private business. Cronyism is a system in which success in business is determined by political connections rather than market forces. Corporate political activity does appear to correlate positively with executive compensation measures, but not robustly with firm performance and profitability measures. This suggests that political connections have no significant effect on the performance of firms or particular industries in most cases, but that company executives do benefit from having closer ties with the political process.

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