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Politically connected suppliers and firm financial stability

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  • Alam, Ahmed W.
  • Houston, Reza

Abstract

While prior studies focus on the impact of a firm’s own political connections on its financial performance, this paper examines whether and how a firm’s financial stability is affected by the political connectivity of its key suppliers. Controlling for supplier-buyer relationship strength and the focal firm’s own political connections, empirical tests reveal that politically connected supplier industries significantly impair the financial performance of a focal firm. Furthermore, a firm’s financial stability is substantially eroded by the increases in political expenditures of its major supplier industry. These outcomes are more severe for focal firms with low market power and remain robust to using a combination of matched samples, dealing with possible selection bias. Further tests indicate that capital investments and business innovations are two potential channels through which politically connected suppliers destabilize the focal firm’s financial performance.

Suggested Citation

  • Alam, Ahmed W. & Houston, Reza, 2025. "Politically connected suppliers and firm financial stability," Economics Letters, Elsevier, vol. 254(C).
    • Handle: RePEc:eee:ecolet:v:254:y:2025:i:c:s0165176525002812
    DOI: 10.1016/j.econlet.2025.112444
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    Keywords

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    JEL classification:

    • C78 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Bargaining Theory; Matching Theory
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D74 - Microeconomics - - Analysis of Collective Decision-Making - - - Conflict; Conflict Resolution; Alliances; Revolutions
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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