of politically connected firms who, in fact, never exercised their proximity to the president for economic advantage). However, the approach may also yield false negatives: some old regime connected firms may establish close relationships with new leaders and not have their assets confiscated. In any event, about half of those on our list of politically connected firms also appear on lists of confiscated assets after the change of regime.

We then matched the list of politically connected businessmen to firms listed on the Cairo stock exchange. The Orbis database includes this information on the board members, managing directors, or major shareholders of 854 firms that are currently or were formerly traded on the exchange.<sup>5</sup> The names of 32 businessmen identified in step one matched unambiguously the names of board members, managers, or major shareholders of 104 firms. Since these 104 firms could be holding companies or investment funds, we further used the Internet to identify the names of all subsidiaries (up to two tiers) and then matched these subsidiaries with firms in the Orbis database.

This process identified 469 firms that are unambiguously controlled, directly or indirectly, by a connected businessman. Of these firms, 47 have a politically connected businessman as a general manager (CEO), 140 have at least one connected board member, and in 334, at least one connected businessman or firm was unambiguously identified to have an ownership stake. In addition, in 172 firms a private equity fund owned by at least one politically connected businessman had an ownership stake.<sup>6</sup> It is likely that the effects of political connections vary according to the incentives of politically connected individuals to exercise them. Those closely involved with the operations of a firm are better able to identify the types of government privileges that would most benefit the firm. Hence, the ability of connected individuals to leverage connections may be strongest if they are the CEO of the relevant firms. However, company owners have unambiguously high-powered incentives to obtain such privileges. Hence, the incentives of politically connected individuals to exercise their connections are greatest if they own at least part of their companies. Both ability and incentives may be weakest for firms where the politically connected have indirect ownership of a connected firm, through politically connected private equity firms.<sup>7</sup> We investigate these issues below.

Our analysis compares the performance and regulatory exposure of sectors according to the concentration of politically connected firms in the sector. This type of analysis is feasible only if there is substantial dispersion in the intensity of political connections across sectors. The first column of Table 1 disaggregates politically connected firms by the type of political connection; the second

> 5 Many large firms were listed at stock exchanges in Egypt since gains from selling shares of listed companies are exempted from taxation. Reportedly, several politically connected firms exploited this legal tax loophole to avoid paying taxes for M&A transactions; i.e., instead of selling firms directly, which is taxable, the transaction was conducted as an untaxed market transaction by first listing the company for sale at the stock exchange (Ahram Online, various issues).

6 Several politically connected private equity funds list the firms of which they hold equity on their website.

> 7 The same ranking applies if we consider that information asymmetry matter among different type of ownerships; i.e., the connected CEO should be most effective in lobbying for privileges as he has the most accurate knowledge of firm specific information and cost structures; the connected owner has less information but still more than the connected private equity investor. Of course, it also matters how “close” the political connection to the businessman is, however, we do not have information to distinguish between different types of connections as all connected businessman are considered to have first tier political influence over regulations and their implementation.

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