02-02-2026
Political connections are a rational economic decision for firms, says the Daniels School’s Mara Faccio, citing the 1990 paper “A dead senator tells no lies” by Brian Roberts. Whether formed via campaign donations or by appointing politicians to boards, they’re common across countries and industries. Though the public may be skittish about the ethics of their politicians' corporate ties, the question isn’t about the value of the connection so much as the nature of the payoff. Is it rooted in preferential treatment or information sharing?
A study by Faccio and coauthor John J. McConnell evaluates the nature of political connections in their paper, “Political connections cause resource misallocation: Evidence from the fall of fascism in Italy.” The findings show that the preferential treatment protects firms regardless of profitability, while the information sharing potentially increases profitability.
The study looks at Italy’s fascist period (1922-1943), when Italian firms increased political bonds seeking preferential treatment (called “rents”). By 1941, 80% of the largest 150 Italian firms had a politician serving as an officer or a director. But after the regime’s collapse and legal changes prohibited fascist politicians from running for office, corporate political ties were severed, creating “a unique quasi-natural experiment” to test the kinds of benefits from political connections.
During the Italian fascist rule, politically entangled firms sought rents such as easier financing, favorable contracts, reduced regulatory scrutiny or tax breaks. This rent-seeking is distinct from organic business growth driven by innovation or productive strategy. Italian history demonstrates that rents not only boosted firm value artificially but also led to systemic resource misallocation: when the political winds shifted, these firms, stripped of their ties, proved to be dramatically underperforming compared to their peers.
After Mussolini’s fall, stringent laws affected firms connected to the regime. They suffered an average 8-10 percentage point annual drop in return on equity versus non-connected peers — clear evidence they profited not through merit but through state favoritism. Crucially, there was no widespread “retaliation” against these companies, indicating the sharp decline was not about public backlash or boycotts, but about loss of artificial support.
In contrast, political investment in democratic contexts can be an underutilized asset. Political donations are a visible and legal means of extending information networks. As Roberts’ seminal U.S. study showed, firms contributing to politicians often see immediate stock price movements. Strict rules against political officeholders sitting on corporate boards and robust systems of checks and balances reduce the scope for egregious rent extraction seen in Italy’s past.
“There is no country that completely separates politicians from business. The fact that it never happens should be the first signal that it probably wouldn't be a good idea. The reason why we don't want to separate completely is that allowing politicians to have business experience means we can attract better people [into government],” says Faccio. “Pretty much every country has struck some kind of balance between what is allowed and what is not allowed. The U.S. is one of the countries with the most restrictions [for Congresspeople].”
Importantly, campaign contributions in democracies often function as “hedges” — firms donate to both sides to cope with political turnover, not just to extract special favors. Ethical boundaries are murkier, as Faccio notes, but the expectation of transparency and public oversight acts as a partial check.
While political connections can boost firm value in both democracies and autocracies, the efficiency and sustainability of these returns vary dramatically depending on institutional context. For business leaders, the actionable takeaway is clear: seek value through genuine productivity and competitive strategy. View political capital as a useful asset and champion governance transparency.
