Paper Politicians, Firms and the Political Business Cycle: Evidence from France
This paper tests whether politically connected CEOs alter their hiring and firing decisions in order to help incumbent politicians in their re-election efforts. We study this question in the context of France, where more than half of the assets traded on the French stock markets are managed by CEOs who were formerly in government. Our results show that publicly-traded firms managed by politically connected CEOs display higher rates of job (plant) creation and lower rates of plant destruction, in election years. These results are larger for firms operating in politically contested areas. We find only limited evidence that these political favors follow partisan lines. Moreover, the results are stronger for incumbents who have more political clout within their party. However, we only find very weak evidence that connected firms benefit from preferential access to government resources such as subsidy programs or tax exemptions. In fact, politically connected firms show lower profits compared to unconnected firms, and this lower performance seems mainly driven by higher labor costs. Overall our results suggest that political connections can have significant costs for the connected firms, which is in contrast to earlier studies that have mainly documented economic benefits from political connections.
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- Political Economy