Abstract

In a research context suggesting that there are positive effects of political connections on firm performance, this paper addressed one mechanism generating performance superiority: cash giving to political candidates in exchange for favors. A dataset from the major 2006 election for president, governor, senator, federal and state deputies was used to estimate a multilevel model of listed firms operating in Brazil, an interesting setting because political institutions favor a close one-to-one relationship between managers and politicians. The main results indicated that campaign contributions related positively to firm capital structure performance (Return on Equity) and to investors’ expectations of profit and value (Tobin’s q), but not operational profitability (Operational Return on Assets). Such a political strategy seemed to be a non-market source of advantage since connectedness apparently related to the reduction of transaction costs leading to financial advantage, but not significantly to opportunities associated with the generation of market failures. The results reinforced theoretical arguments that political connections directly improve firm performance by means of providing superior and lower-cost access to financial debt and foster market expectation and valuation due to close relations between businesses and politicians.

Key words: Political strategy, firm performance, political connections, campaign contributions.