Political Connections and Government Contracting: An International Analysis of Procurement Decisions and Firm Value

We examine whether political connections influence public procurement award decisions made by government bodies worldwide. We find that politically connected firms are more likely to receive government contracts and larger value contracts. Focusing on defense contracts, where the strength of politically connected social ties can be more directly assessed, we find that employing former military personnel from the contract-awarding country in management increases the value of awarded contracts by around 40%. This effect is more pronounced with high-ranking ex-military personnel (88% increase) compared to lower-ranking ones (26% increase). Moreover, our analysis reveals that political connections have a stronger impact on government contracting for foreign-incorporated firms (54% increase in contract value) than on domestic firms (29% increase). Financial and institutional development significantly moderate the effects of political connections. We also observe that politically connected government contracting positively impacts firm value in less developed countries but negatively in more developed ones. Furthermore, the effect on firm value is stronger for foreign contractors than local ones. Lastly, our study demonstrates that politically connected government contracting distorts firms’ capital allocation efficiency, particularly for local contractors in developed countries. Our main findings remain robust across various variable definitions, estimation techniques, and adjustments for potential endogeneity.