Political connections cause resource misallocation: Evidence from the fall of fascism in Italy

Abstract The fall of fascism in Italy in 1943–1944 was followed by the issuance of laws and decrees that made former fascist politicians ineligible for political office. This setting provides a unique quasi‐natural experiment that exogenously and permanently disrupted then prevalent corporate political connections. We find that following the exogenous disruption of their political connections, previously politically connected firms significantly underperform their peers both economically and statistically. These results imply that political connections lead to misallocation of economic resources.