Effect of political connections on profit persistence: Evidence from India

Abstract

We examine how political connections through the board of directors help in creating and sustaining rents. While the extant literature focuses on the role of political connections in the creation of rents, we distinguish between product markets and political markets, and subsequently examine how rents can be created and sustained in these markets. Using a unique panel dataset of candidates elected at either the national or state level in India and examining their membership of board of directors of both listed and unlisted firms, we find that political connections are useful for sustaining the profit performance of firms with prior superior profit performance while improving the profit performance of firms with prior inferior profit performance. Moreover, connections with state-level politicians have a larger effect on profit persistence compared to connections with national-level politicians. Finally, persistence in profit performance is higher in regulated industries than in non-regulated industries.