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The Value of Political Connections: Evidence from the Czech Republic
Thesis title in Czech: Hodnota politických konexí:
Výsledky pro Českou republiku
Thesis title in English: The Value of Political Connections:
Evidence from the Czech Republic
Key words: financování politických stran, dary politickým stranám, sponzoring, politika, politické konexe, výkonnost firem
English key words: party funding, political connections, campaign contributions, firm performance, rent-seeking, politics
Academic year of topic announcement: 2014/2015
Type of assignment: diploma thesis
Thesis language: angličtina
Department: Institute of Economic Studies (23-IES)
Supervisor: doc. Petr Janský, M.Sc., Ph.D.
Author: hidden - assigned by the advisor
Date of registration: 15.06.2015
Date of assignment: 17.06.2015
Date and time of defence: 22.06.2016 11:00
Venue of defence: IES
Date of electronic submission:06.05.2016
Date of proceeded defence: 22.06.2016
Reviewers: doc. PhDr. Martin Gregor, Ph.D.
URKUND check:
Aggarwal, R. K. et. al, 2012. Corporate Political Donations: Investment or Agency? Business and Politics 14, 1–40.
Ansolabehere S. et al., 2003. Why is There So Little Money in U.S. Politics? Journal of Economic Perspectives 17, 105–130.
Centrum aplikované ekonomie & Naši, o.s., 2012. Konexe – studie o střetu zájmů v pražských veřejných zakázkách.
Claessens, S. et al., 2008. Political Connections and Preferential Access to Finance: The Role of Campaign Contributions. Journal of Financial Economics 88, 554–580.
Cooper, J. et al., 2010. Corporate Political Contributions and Stock Returns. Journal of Finance 65, 687–724.
Coviello, C. & Gagliarducci, S., 2008. Political Turnover and Competition in Public Procurement Auctions.
de Figueiredo, R.J.P. & Edwards, G., 2007. Does Private Money Buy Public Policy? Campaign Contributions and Regulatory Outcomes in Telecommunications. Journal of Economics & Management Strategy 16, 547–576.
Dombrovsky, V., 2008. Do Political Connections Matter? Firm-Level Evidence from Latvia. Baltic International Centre for Economic Policy Studies (BICEPS) and Stockholm School of Economics in Riga (SSE Riga).
Faccio, M., 2002. Politically-Connected Firms: Can They Squeeze the State?
Faccio, M., 2006. Politically Connected Firms. American Economic Review 96, 369–386.
Fisman R., 2001. Estimating the Value of Political Connections. American Economic Review 91, 1095–1102.
Fisman, R. et al., 2012. Estimating the Value of Connections to Vice-President Cheney. The B.E. Journal of Economic Analysis & Policy 13, 1–20.
Goldman, E. et al., 2013. Politically Connections and the Allocation of Procurement Contracts. Review of Finance 1, pp. 1–32. doi:10.1093/rof/rfs039 International Institute for Democracy and Electoral Assistance, 2014. Is There a Ban on Corporate Donations to Political Parties?
Jayachandran, S., 2004. The Jeffords Effect. UCLA Department of Economics.
Khwaja, A.I. & Mian, A., 2005. Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market. The Quarterly Journal of Economics 120, 1371–1411.
Palanský, M., 2014. Political Connections and Public Procurement: Evidence from the Czech Republic. Charles University in Prague, available at:
Palanský, M., Skuhrovec, J. & Titl, V., 2015. Analysis of Czech Political Party Donations. EconLab. Available at:
Počarovský, J., 2014. Political Connections in Public Procurement: A Supply Side Analysis. Charles University in Prague, available at:
Roberts, B. E., 1990. A Dead Senator Tells No Lies: Seniority and the Distribution of Federal Benefits. American Journal of Political Science 34, pp. 31–58.
Snyder, J. M., Jr., 1990. Campaign Contributions as Investments: The U.S. House of Representatives, 1980-1986. Journal of Political Economy 98, 1195–1227.
Stratmann, T., 2005. Some Talk: Money in Politics. A (Partial) Review of the Literature. Public Choice 124, 135–156.
Straub, S., 2014. Political Firms, Public Procurement, and the Democratization Process. Toulouse School of Economics (TSE).
Voth, J. & Ferguson, T., 2008. Betting on Hitler: The value of political connections in Nazi Germany. Department of Economics and Business, Universitat Pompeu Fabra.
Preliminary scope of work
Political connections of corporations are a wildly discussed topic in both the academia and the media. From personal ties (friendships, relationships etc.) to more ‘economic’ connections, such as campaign contributions or discounted services, the connectedness of politician with firms constitutes many risks of conflicts of interest, corruption or rent-seeking. In this paper, we focus on one specific channel through which firms may connect with political parties - campaign contributions by legal persons. What motivates firms to support a political party financially? The purpose of companies is to generate profit. Does donating to political parties enhance the profits of the donating firms? If so, to what extent?

Previous literature has shown that firms that are somehow connected to the parties in power may enjoy significant benefits as compared to non-donating firms. These benefits take on diverse shapes – from rather indirect channels such as legislation skewed in favor of specific firms and better access to credit to more direct ones, such as influenced outcomes of public procurement auctions or state and European grants. Khwaja, A.I. & Mian, A. (2005) showed that Pakistani firms associated with politicians enjoy better access to credit, Claessens, S. et al. (2008) obtained similar results in Brazil. de Figueiredo, R.J.P. & Edwards, G. (2007) found a significant effect of private money on regulatory outcomes. Some researchers, for example Goldman, E. et al. (2013) , who focused on American S&P 500 firms, has found a significant positive effect of connections on the allocation of public funds through procurement spending. Coviello, C. & Gagliarducci, S. (2008) showed that a change in the identity of the mayor of a municipality rationalizes its public spending using Italian data. The majority of similar studies only examine publicly listed firms and central government agencies. One of the exceptions, Dombrovsky, V. (2008), who draws on the universe of all registered firms in Latvia, obtains results supporting the hypothesis that connections help to add value to firms. Similar results were reached by Straub, S. (2014) who examined the case of Paraguay using high-quality data on both public procurement and 700 largest public procurement winners.

Another strand of literature to which this paper adds is the one focusing on political donations themselves. We present a novel, hand-collected dataset that is unique both in the Czech Republic and internationally. It comprises all donations made to political parties between 1995 and 2014. To our knowledge, these data have never been analyzed in the extent we reach in this paper. In addition, we publish the extended dataset online at, which is a project run by EconLab, a Czech NGO. We provide the option to download the data in a way that allows for

Researchers employing data on political donations include for example de Figueiredo, R.J.P. & Edwards, G., (2007), who provide a political explanation for variation in regulatory outcomes across the US. Their results suggest that there is a positive and significant relationship between donations by telecommunication companies and the level of local loop prices. While most of the literature analyzing political contributions is based on US data, partly due to bad availability of data in other countries, there are some exceptions. For example, Claessens, S. et al. (2008) successfully unveiled that Brazilian firms which donated money to later elected politicians had higher stock returns after the elections than a non-donating control group. Also, they pointed to one specific channel through which this added value may have been generated – preferential access to bank loans.

Last but not least, this paper contributes to the Czech literature on political economy. In the last few years, the politicians and media often speak of the critical need of a revision of the act on political party financing. Partly motivated by these discussions, a number of analyses have been carried out recently. Palanský (2014) and Počarovský (2014) estimated the effects of political connections on public procurement outcomes; Palanský et al. (2015) analyzed the parties’ financing more thoroughly, focusing mainly on the shortcomings of the current legislation. This paper provides additional arguments to this discussion.

There are several reasons why the Czech Republic is an ideal case to study the effects of political donations. Firstly, taking into account various studies and surveys and individual cases presented in the media, the value of political connections is likely to be higher than in other countries. Secondly, the availability of high quality data on both political donations and firm performance during a remarkably long time period allows for exceptional analyses. Third, the current discussions about the new act on political financing lack fundamental arguments based on hard data. With this paper, we provide additional input to the discussion.

We develop several empirical hypotheses to test the effects of political donations on firm performance. The first one is that firms that donate to political parties have significantly better performance than otherwise similar firms. Second, the more a firm donates, the better its performance within the group of donating firms. This way, we uncover the extent to which corporate political donations pay off. As the dependent variables, we use political donations and their volume. Furthermore, we distinguish whether the donation was made to the party in power (meaning being a part of the governing coalition) or to another party. This allows for the third hypothesis of whether donations to the parties in power have a higher effect on economic performance of firms than donations to other parties. As the explained variables, we use ROE and ROI ratios as well as EBIT, all obtained from the MAGNUS database.

Using a fixed effects regresssion model, we estimate the relationship between firms‘ donations to political parties and profits these firms have made. Using a sample of non-donating firms as a control group, we employ the method of difference-in-differences, thereby following numerous previous literature (Claessens, S. et al., 2008; Faccio, 2006; Goldman, E. et al., 2008).

Expected Contribution:
The results of this paper can be used as advocacy material in the ongoing discussions concerning the revision of the act on political party financing. Furthermore, it provides additional evidence in the field of political connectedness and its effects.
Preliminary scope of work in English
Literature Review
Empirical Methodology
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