Politically connected firms and access to credit: Evidence from India

Abstract

This paper explores the role of political connections in facilitating access to credit for firms in the Indian corporate sector. This study aims to address gaps in the literature by combining theoretical insights with empirical data. Our model proposes that political connections may reduce risk for firms, thereby enhancing their access to credit. Utilizing a unique dataset of S&P BSE 500 companies from 2001 to 2019, we analyze the extent of these connections and their impact on financial leverage and debt-to-asset ratios. Our findings reveal that politically connected firms, defined by their monetary donations to political parties and the inclusion of Members of Parliament on their boards, exhibit significantly higher financial leverage and debt-to-asset ratios than unconnected firms. This implies a lower perceived borrower’s risk and an advantageous position in accessing credit, likely a result of their political ties. The implications of our findings extend to the realms of corporate governance, economic policy, and the broader understanding of emerging market dynamics.