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Political connections, investment inefficiency, and the Indian banking crisis

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  • Chahal, Rishman Jot Kaur
  • Ahmad, Wasim

Abstract

This paper examines the investment inefficiency of politically connected firms (PCFs) in the Indian context. We argue that the investment inefficiency of PCFs may reveal the Twin-balance sheet (TBS) characteristics of the banking crisis through interactions between PCFs and Government-owned Banks (GOBs). Using the unique dataset on PCFs in India and the panel quantile regression, we find that the strong PCFs exhibit a higher level of investment inefficiency than the weak PCFs. We also highlight the advantages of quantile regression in an overinvestment analysis. The findings may help trace the link between the investment boom of the mid-2000s and the subsequent twin-balance sheet crisis. The results are entirely new in the Indian context.

Suggested Citation

  • Chahal, Rishman Jot Kaur & Ahmad, Wasim, 2022. "Political connections, investment inefficiency, and the Indian banking crisis," The Quarterly Review of Economics and Finance, Elsevier, vol. 85(C), pages 16-30.
    • Handle: RePEc:eee:quaeco:v:85:y:2022:i:c:p:16-30
    DOI: 10.1016/j.qref.2020.10.016
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    Cited by:

    1. Saibal Ghosh, 2023. "Political connections and bank behaviour," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 52(1), February.
    2. Wan, Jianjun & Lee, Chien-Chiang, 2023. "Corporate investment and the dilemma of the monetary policy: Evidence from China," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 106-121.

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    More about this item

    Keywords

    Political connections; Government banks; Overinvestment; Networks;
    All these keywords.

    JEL classification:

    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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