degree to which political connections affect firm performance, as well as economic development more broadly. Past research has tended to address only one or another of these concerns. This paper addresses all of them.

Beginning with Fisman’s (2001) seminal contribution, scholars have systematically documented the value of political connections by investigating movements in the stock prices of connected firms relative to other firms when the probability of a change in political leadership increases. Like Fisman, Chekir and Diwan (2012) use an event study methodology and apply it to Egypt. They estimate the value of political connections for 22 connected, publicly traded firms to be about 13 to 16 percent of the firms’ value, close to Fisman’s estimates of the value of connectedness in Suharto’s Indonesia.

The fact that the value of connected firms falls when leadership change threatens has three different interpretations. First, regime change could reduce the value of these firms if the firms benefit from policy distortions that would be reversed by new leaders. . Second, the threat of regime change could reduce the value of politically connected firms if they are better able than other firms to defend themselves from predation by the current – but not the next – government, but otherwise receive no policy advantages. Third, the simple fact of their connectedness may leave firms open to retribution by a new regime, a threat that would again reduce their value. In this paper, we address these ambiguities by examining a wide range of mechanisms that support the first interpretation.

A large literature has also addressed this ambiguity by identifying specific mechanisms through which firms may gain from political connections (e.g., Cull and Xu 2005 for China; Johnson and Mitton 2003 for Malaysia; Khwaja and Mian 2005 for Pakistan; Leuz and Oberholzer-Gee 2006 for Indonesia; Claessens, et al. 2006 for Brazil; and Faccio et al. 2006 based on cross-country panel data; see also Boubakri et al. 2010 and Goldman, et al. 2008). Most studies find that connected firms have better access to finance (higher debt). Some find that connected firms exhibit higher default rates and receive more frequent bailouts. Connected firms also enjoy tax advantages, greater market power and preferential access to government contracts. Boubakri et al. (2010) show that firms increase their indebtedness after establishing connections. Rijkers et al. (2014) examine the behavior of 214 Tunisian firms that were expropriated after the Jasmine Revolution because they were owned by members of the Ben-Ali family; these companies disproportionately benefited from FDI restrictions and licensing requirements.

Our paper advances this approach to research on state-business relations in two ways. First, ours is the first analysis that demonstrates the breadth of regulatory advantages that connected firms receive: they disproportionately benefit from energy subsidies, trade protection, access to government land, and biased regulatory enforcement.<sup>1</sup> Second, like Rijkers, et al. (2014), we focus almost entirely on the advantages enjoyed by politically connected firms that are clearly the result of explicit government decisions to grant them policy privileges that other firms do not enjoy.

Researchers have also asked how politically connected firms perform relative to nonconnected firms. Besides the advantages conferred by the privileges they receive over non-connected firms, connected firms could also be facing additional costs related to their need to repay the favors

> 1 Kroszner and Stratmann (1998) show that political influence affects regulatory protection in the United States, but influential firms are far from “cronyistic”. Rather, legislators simply pay more attention to, and are more susceptible to lobbying by, economic sectors that are important in their districts.

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