Corporate political connections in Russia and their implications for firm level operational, financial, and investment activities
This dissertation consists of three chapters representing three self contained essays on the effects of corporate political connections on firm operational, financial, and investment activities. The research is based on a sample of Russian non state owned companies operating within the period of 2000 2013. Chapter 1 investigates the effect of corporate political connections on firm performance and profitability. I find that political connections to the executive branch of the central (federal) government positively affect connected firm's return on sales, return on assets, return on equity and market to book ratio. These improvements are conditioned by better operating performance of the connected firm. At the same time financial and taxation costs are not seriously affected by political connections. Contrary to the effect of federal ties, connections to regional authorities bring more costs than benefits to the connected firms with both operating performance and overall performance indicators showing decline in presence of regional political ties. The latter effect can be explained by greater costs which regionally connected firms have to bear in order to contribute to the economic development of regions and provinces to which they are connected. Overall, Chapter 1 provides direct evidence on the effects of corporate political connections on firm profitability, performance, and their basic determinants, also showing that different types of connections differently affect performance. Chapter 2 examines the effect of corporate political and bank connections on firm level cost of debt. I find that corporate connections to banks decrease cost of debt of a firm. However this effect works only if a firm has connections to a state owned bank, not a private bank, and connections to a state owned bank are to be maintained through a significant shareholder of the firm, not CEO, or board member. I also find that corporate connections to the executive branch of the central (federal) government decrease cost of debt. The latter effect works only if political connections are strong and cohesive enough, i.e. they were formed under circumstances that required high level of mutual trust and reliability between parties. Overall, the second chapter provides evidence that political and bank connections do really affect cost of debt and reveals important conditions under which connections can have an impact on this variable. Chapter 3 investigates the effect of corporate political connections on firm level acquisitions activity. I find that political connections to central (federal) government positively affect firm's propensity to purchase stakes in other firms. This effect works well in the domestic market, but not in the foreign markets. It does also work well with regard to acquisitions of stakes in the open market, but, ironically, not in the process of privatization. At the same time I find that political connections to regional governments are negatively associated with the probability of purchasing a stake by the acquirer. The latter effect may have an explanation that in a "small world" of regional political and business elites it is risky for participants to violate the regional equilibrium of wealth and power, thus firms demonstrate acquisitions activity levels lower than that of the reference group of unconnected firms. Overall, the third chapter provides evidence on the effects of corporate political connections on bidder's acquisitions activity, showing, however, that different types of connections may differently impact bidder's propensity to acquire stakes in other firms.