Connections between firms and politicians are widespread around the world. Faccio (2006) documents the existence of publicly traded firms with national political connections in 35 of 45 countries; these firms account for nearly 8% of the world’s stock market capitalization. She also documents that national political connections are valuable, especially in countries with weak political institutions.
In our paper, The Value of Local Political Connections in a Low-Corruption Environment, forthcoming in the Journal of Financial Economics, we explore the value of local political connections in a low-corruption environment. We use an administrative reform that generates exogenous variations in the size of local municipalities in Denmark to establish the effect of changes in political power on the profitability of firms that have family ties with local politicians. On average, we find that (1) doubling the political power (as measured by population per elected politician) doubles the performance of politically connected firms, and (2) the effect is larger in industries delivering goods and services to the public sector.