Work detail

The Value of Political Connections: Evidence from the Czech Republic

Author: Mgr. Miroslav Palanský
Year: 2016 - summer
Leaders: Petr Janský Ph.D.
Consultants:
Work type: Finance, Financial Markets and Banking
Masters
Language: English
Pages: 70
Awards and prizes:
Link: https://is.cuni.cz/webapps/zzp/detail/166163/
Abstract: This thesis estimates the value of political connections in the Czech Republic and it is divided into two
parts. The first one explores the recently extended, most advanced publicly available data set on
political party financing in the Czech Republic, covering the time period 1995-2015. We analyze basic
patterns in party funding and their development over time. We focus primarily on private funding from
both legal and natural persons. The data show that there exists substantial heterogeneity in the volume
of private funding across parties and over time, but contributions from the government budget remain
the most important source of income for all larger parties. We analyze the available data on donations
and discuss several issues regarding the notion that donors may view contributions as investment,
yielding possible profits in the future.
In the second part, we use the data set of corporate donations to construct a proxy variable for political
connections and to estimate the effect of being connected to a political party on the financial
performance of such firms. We find that the connected firms perform significantly better than the nonconnected
ones in the years following the establishment of the connection. Furthermore, the difference
is higher for firms that work closely with the public sector. We then develop a novel, dynamic approach
to matching connected firms with their non-connected but otherwise similar peers, and find that on
average, the connected firms report returns on equity and returns on assets approximately 20 to 30 %
higher than the non-connected ones. The results also suggest that public procurement-winning firms
perform similarly as the donating firms, pointing to the importance of the fact that donations are not
the only source of connections between firms and politicians.

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ČSOB
Deloitte
McKinsey & Company

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