IMPACT OF POLITICIANS CONSTITUENCY FAVORITISM ON CORPORATE INVESTMENT: CASE OF INDIA

Abstract

One can see many examples of politicians’ favoritism toward their native places or their hometowns or constituencies throughout the world. This behavior of people in power or politicians in general is backed by the social identity theory. Such behavior of politicians has various impacts on the country or state’s economy or the local economy of the place the politicians are related to or the place over which these politicians have some sort of managerial power. In this research we are going to look for the impact of politicians' favoritism towards their constituencies on corporate investment. In general, corporate investment is regulated by many factors, in case of perfect markets with no hurdles firm investments are determined by the various investment opportunities that are present to the firm (Modigilani and Miller, 1958). However, in the real world there exists frictions in the form of asymmetric information (Fazzari et. al., 1988). The firm’s investment is also impacted by agency issues (Lang et. al., 1991). Political connections are determined as a new hurdle which distorts the firm’s investments in emerging economies (Pan and Tian, 2020). This study is going to research constituency favoritism where corporate investments are affected by politician’s favoritism towards their constituency. This favoritism theory is based on identity economics which indicates there exists two criterions based on which economic decisions are made.