Abstract

Do firms benefit from establishing political connections and do these benefits vary under different political configurations? We take up this question in Egypt be- tween 1890 and 1950, during which the country's political economy experienced significant turning points. Our analysis relies on assembling two novel, detailed datasets on corporations and political representatives, where we merge firm-level monthly stock market data of publicly traded corporations (1908–40), firm-level annual dividends of all corporations between 1908–39, firm-level data on time to entry and survival (1890–1950), industry-level monthly entry-exit (1890–50), and individual-level data on corporation founders (1890–1950), members of parlia- ment (MPs), and members of cabinet (MCs). We define a corporation as connected to an MP (or MC) in a given month if one of its founders served as an MP (or MC) in that month. Our empirical exercises show that connections to MPs or MCs raised stock market returns, led to higher likelihood of paying dividends, improved firm survival, delayed dissolution after reporting first loss, and eased legal barri- ers to entry during the semi-independence period. But these connected companies faced longer delays in getting started after clearing legal hurdles of incorporation. Higher concentration of connected incumbents in an industry depressed entry more generally and raised the likelihood that entrants were more connected themselves. During the colonial period, political connections either decreased firm value and dividend payouts or had null effects. The findings support two conclusions: (1) the overarching political configuration—colonial vs. independence even if nominal— mattered for connections to produce benefits for firms, (2) corporations benefited from connections by enjoying less competitive pressure and raising barriers to en- try for unconnected firms. The proliferation of connections overtime, the plausible negative selection to connections, and the negative effects on industry-wide firm creative destruction imply significant distortions.