Politically connected firms and privileged access to credit: Evidence from Central and Eastern Europe

We use firm-level data from six Central and Eastern European economies to examine whether political connections ease financial constraints faced by firms. We show that politically connected firms are characterized by higher leverage, lower profitability, and lower productivity of capital than unconnected firms. However, we do not find any significant difference in investment rates between them. Politically connected firms, though less productive than unconnected firms, borrow more because they have easier access to credit. Our results are consistent with the idea that political connections distort capital allocation and may have welfare costs.