Politically Connected Owners

• Author: Timm Betz,Amy Pond
• DOI: http://doi.org/10.1177/00104140221109428
• Published date: 01 March 2023
• Date: 01 March 2023
• Subject Matter: Articles

Article

Comparative Political Studies

2023, Vol. 56(4) 561–595

© The Author(s) 2022

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DOI: 10.1177/00104140221109428

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Politically Connected

Owners

Timm Betz

1,2,3

and Amy Pond

1,3



Abstract

Political connections provide substantial benef‌its to f‌irms. We emphasize the

ownership of f‌irms as an important channel through which political con-

nections operate and identify a resulting link between political turnover and

turnover in the ownership of f‌irms: Political turnover prompts newly po-

litically connected individuals to take, and newly disconnected individuals to

cede, ownership of f‌irms. This pattern should be more pronounced in

countries with weaker property rights, among f‌irms with publicly recorded

owners, and among f‌irms with more immobile assets. Moreover, f‌irms that

experience changes to ownership during periods of political turnover should

have elevated political connections and therefore pay less taxes and earn

higher prof‌its. Analyses of the ownership structure of f‌irms in 87 countries

are consistent with the theory. Because politically connected owners allow

f‌irms to compensate for other vulnerabilities, the theory also explains mixed

f‌indings in prior work on the consequences of asset immobility.

Keywords

f‌irm ownership, political turnover, political connections, political risk,

expropriation, property rights, corruption, asset mobility, ownership

structure, shell company

1

Department of Governance, TUM School of Social Sciences and Technology, Technical

University of Munich, Munich, Germany

2

Department of Economics and Policy, TUM School of Management, Technical University of

Munich, Munich, Germany

3

Munich School of Politics and Public Policy, Munich, Germany

Corresponding Author:

Amy Pond, Department of Governance, TUM School of Social Sciences and Technology,

Technical University of Munich, Richard-Wagner-Str. 1, Munich 80333, Germany.

Email: amy.pond@tum.de

How do changes in political leadership affect the economy? A large literature

highlights the connections between political and economic markets. Political

turnover, through its competitive effects, encourages policy innovation and is

a basic condition for political accountability (Dahl, 1967). It also ensures that

policy failures are pointed out by the opposition and addressed by the in-

cumbent or by a successor (Kono, 2006;Wittman, 1989). These effects should

produce more eff‌icient policies and faster growth. Yet, political turnover also

results in uncertainty and policy change. By undermining investment and

dampening growth, these effects point to the potentially adverse economic

consequences of political turnover (Arezki & Fetzer, 2019;Earle & Scott,

2015).

Exploring another consequence of political turnover, we argue that political

turnover is likely to lead to changes in f‌irm ownership. We begin with two

observations. First, owners with political connections plausibly expect to earn

elevated prof‌its relative to those without connections (Faccio, 2006;Fisman,

2001;Krueger, 1974;Szakonyi, 2018).

1

Second, political turnover leads to a

shift in connections (Albertus & Menaldo, 2012;Mattes et al., 2016). Building

on these premises, we identify a specif‌ic mechanism through which political

turnover leads to ownership changes. Because political connections and thus

some of the policy consequences of political turnover are specif‌ic to owners, a

f‌irm’s value is specif‌ic to owners as well: the value of a f‌irm’s assets for a

connected owner is higher than for an unconnected owner. Owners that lost

connections are willing to sell at a lower price than before, and owners that

gained connections are willing to purchase at a higher price than before.

Political turnover thus creates a wedge in the value of ownership for current

and potential owners, resulting in an environment in which the ownership of

f‌irms is likely to be transferred across individuals.

In extreme cases, governments may assist politically connected raiders

with takeovers (Gray et al., 2019;Markus, 2015;Markus & Charnysh, 2017)

or they may reassign ownership directly. After Viktor Yushchenko was elected

President of Ukraine in 2005, the government nationalized and sold f‌irms to

new owners in a process called “reprivatization”. The targeted f‌irms –in-

cluding large steel producer Kryvorizhstal Steel –had few connections to

President Yushchenko but their former owners were associated with former

President Leonid Kuchma and his chosen successor Victor Yanukovych

(

˚

Aslund, 2005;Earle & Scott, 2015). That these nationalizations are more

common among politically connected f‌irms suggests that ownership is sen-

sitive to political conditions (Resimic, 2021).

We argue that these extreme cases are part of a broader pattern where the

ownership of f‌irms reacts to politics. We expect political turnover to result in

elevated ownership turnover that is, at least partially, voluntary and wide-

spread. These effects should be most pronounced in countries with weak

property rights, among f‌irms with more immobile assets, and among f‌irms

562 Comparative Political Studies 56(4)

with more clarity in their ownership structure: Weak property rights create an

opportunity for politically connected individuals to seize ownership, while the

owners of f‌irms with immobile assets are more sensitive to policy change

(Bates & Lien, 1985;Boix, 2003). Firm owners may obfuscate their identities

by locating the ownership of their assets in shell companies abroad; these may

be harder for politically connected raiders to target (Earle et al., 2019;Markus,

2015).

Empirical results from f‌irm-level data are consistent with our expecta-

tions.

2

Drawing on data from up to 87 countries, we identify direct share-

holders of the largest f‌irms in each market using the Orbis database. To

measure turnover in f‌irm ownership, we code changes to the identity of

majority owners. We show that political turnover, as measured in the REIGN

data set (Bell et al., 2021), leads to elevated ownership turnover. The effect is

larger among f‌irms with more immobile assets and in countries with weak

property rights. The relationship is also conf‌ined to those f‌irms where the

names of individual owners are recorded in the Orbis database (which in turn

draws on business registries): where ownership appears more obfuscated, the

effects of political turnover are depressed.

Because the relationship could be endogenous due to omitted variables,

we also report results from instrumental variable specif‌ications, using ex-

ogenously timed elections as an instrument for political turnover. We further

show that political turnover does not correlate with managerial turnover,

indicating that these new owners are unlikely to have taken over due to

superior expertise. Finally, we offer tentative evidence that f‌irms whose

ownership changed during political turnover earn higher prof‌its and pay

lower taxes.

By emphasizing political inf‌luence through the owners of a f‌irm’s assets,

we contribute to a growing literature that examines the use of ownership

structures for political inf‌luence, for example through partnerships with

foreign owners (Betz & Pond, 2019;Gray, 2020;Markus, 2008), through the

design of complex offshore ownership structures (Betz et al., 2021;Earle

et al., 2019), or through the issue of stock market securities (Pond &

Zafeiridou, 2020). While we view the issue from the perspective of the

owners, rather than from the perspective of f‌irms, our framework builds on a

similar logic: we identify how the ownership structure of f‌irms responds to

political conditions, because owners differ in their political clout. We consider

owners whose clout comes from their ties to the government, rather than from

owners whose clout comes from their independence from the government. We

also note the distinction between f‌irms and owners: Starting from the premise

that political connections are f‌ixed to individuals, we highlight how political

connections become endogenous to f‌irms, because connected individuals are

more likely to become f‌irm owners.

Betz and Pond 563