Political Connections Cause Resource Misallocation: Evidence from the Fall of Fascism in Italy

Political Connections Cause Resource Misallocation: Evidence from the Fall of Fascism in Italy

Mara Faccio, John J. McConnell

Series number :

Serial Number: 
939/2023

Date posted :

November 20 2023

Last revised :

November 20 2023
SSRN Share

Keywords

  • political connections • 
  • capital misallocation

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. We use this setting as a quasi-natural experiment that exogenously disrupted then prevalent corporate political connections.

We find that following the exogenous disruption of their political connections, previously politically connected firms underperform their peers. The relative underperformance is both statistically and economically significant. These results imply that political connections lead to misallocation of economic resources because resources allocated to politically connected firms are not allocated to their best uses.

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Authors

Professor
Real name:
Mara Faccio
Research Member
Purdue University - Mitchell E. Daniels, Jr. School of Business
Real name:
John J. McConnell