Benefits and costs of political connections: evidence from Tunisia

Abstract

The purpose of this paper is to investigate whether political connections in Tunisia give firms advantages such us easy access to external financing and tax benefits and/or force them to spend more on employment. In addition, we show if political connections affect accounting and market performance. Using a sample of listed Tunisian firms between 2006 and 2010, we apply OLS regression to identify the effect of political connections on firms' policies and performance. We find that politically connected firms gain easier access to credit with relatively high costs compared to unconnected counterparts. They are offered more government subsidies and they enjoy better tax benefits thanks to their ties with politicians. Additionally, politically connected firms outperform their unconnected counterparts and they have higher value. Hence, political relationships seem to help firms getting access to key resources which improve their accounting and market performance without contributing to the job creation process. Our results are more robust for non-financial firms.