Political connections and profit persistence in India

Abstract

The extant literature on corporate political activities has extensively examined whether and how political connections help in improving performance. We extend this literature by examining whether and how political connections help in profit persistence, a fundamental concern for firms. Using a unique panel dataset of politicians who were elected at either the national or state level in India and examining their membership on the board of directors of firms, we find that firms with political connections demonstrate higher profit persistence. Further, we report that connections with state-level politicians have a larger effect on persistence compared to connections with national-level politicians. This finding emphasizes the importance of micro and recurring benefits in emerging economies such as India, in the form of help with acquiring licenses, permits, land and infrastructure, which are usually provided by state-level politicians relative to policy-related benefits, which are typically provided by national-level politicians. Our results also show that political connections have a greater effect on profit persistence for firms that are affiliated to business groups. Our results suggest that political connections seem to operate as higher-order resources, defined as resources that do not contribute to profits directly but can affect other resources that in turn affect profits over time.