Sukrit Puri on the Entanglement between Business and Politics in India

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, a podcast where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and this is the 2024 job market series where I speak with young scholars entering the academic job market about the latest research in India. 

I spoke with Sukrit Puri, who is a PhD candidate in political science at MIT and an Elinor Ostrom fellow at the Mercatus Center at George Mason University. His research focus is on the entanglement between business and politics in emerging economies, and his dissertation focuses on family firms in India. We discussed his job market paper, Corporate Kinship: Political Attachments of the Family Firm, we talked about how family firms differ from management and expert run businesses in India, whether it is in their firm structure or their political giving, whether family firms are most strategic or expressive in politics, the differences in the nature of the quid pro quo for a family firm versus a management run firm, the latest electoral bond scheme, and much more. 

For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts.

Hi, Sukrit. Welcome to the show. It's such a pleasure to have you here, and it's so nice to meet you again. You are a Mercatus fellow, and you've been in and out of our office, but it's very cool to do this and to see you on the job market.

SUKRIT PURI: Thank you so much, Shruti. I've been a regular listener to your show for my entire doctoral program, and it's been a large inspiration for my work as well. It's really a pleasure.

RAJAGOPALAN: Then I must apologize in advance. [laughs]

PURI: No, no.

Analyzing Family-Run Firms and Campaign Donations 

RAJAGOPALAN: In your job market, you are looking at political connections and the entanglement between politics and business, which is something that's very exciting for me given my intellectual and personal background. Your job market paper is fascinating because it starts looking not just at firms, but family-run firms in India, which is not a uniquely Indian thing, but in India we have a lot of them. 

What you show is that even though India has this multi-party system, both at the union level and the state levels, firms with greater family involvement, especially at the board and the leadership level, overwhelmingly tend to remain loyal to a particular political party, as opposed to what you would normally expect, which is they donate to everyone. They hedge their bets if it's a closed contest or they switch their loyalties as the economy is changing or as the local politics are changing. 

What you also find is that these family firms, which is very counterintuitive, are more likely to donate to what you call “lost causes,” politically lost causes. That is, parties that are not holding state-level or national-level office at the moment. The quid pro quo is not very obvious for what these parties that are not in power can do for the firm. You do this by looking at campaign contributions from 2003 to 2021, so it's the post-liberalization, non “License-Permit Raj” kind of world. 

The quid pro quo that you specifically study is in the form of government contracts or public sector loans on favorable terms, both of which are well established in the literature. Your main explanation is that for these family firms, the political participation is not so much about economic and political opportunism. It is much more driven by long-term relationships, caste networks, kinship networks, and so on.

Is this a good way to think about what you're doing in your paper?

PURI: Thank you so much. That was an excellent summary.

A driving motivation for any study of business and politics is recognizing that commentators, journalists, academics world over are ringing the alarm bells about corporate influence over democratic politics. Who are these unelected folks that are coming in, distorting the democratic field, distorting accountability in politics, things like that? 

The way people have looked at this is, they have treated corporations as almost like a homogeneous profit-maximizing entity. You and I know that a corporation is nothing but an amalgamation of individuals that come together under certain institutional conditions. There's tons of variation in types of companies. Not all companies are the same. I wanted to take that more seriously and understand: What are the different types of companies. Different companies can be different in the people that are involved in running it, in their goals and aspirations, in how they operate. I wanted to see how different types of companies might participate in the political arena differently.

Now India is one of those countries where people have been ringing the alarm bells of corporate influence. The Billionaire Raj by James Crabtree is a fantastic account of crony capitalism in the post-liberalization period. One thing when you're studying businesses in India is you can't escape the fact that these businesses all tend to be family-run affairs. I wanted to just take that more seriously because the idea is—certainly the literature on family businesses has recognized that—they are not always a permanently purely strategic profit-maximizing actor.

The family business literature recognizes that family businesses have a series of non-economic incentives that might change and change the choices that they make. My question was, what about the political choices that a family business might make? How might that look different? India is my setting.

How Family Businesses Donate Politically in Relation to Corporations and Individuals

RAJAGOPALAN: Cutting into this, the way you phrase it in the paper is: Family businesses depart from a purely profit-maximizing enterprise. This may be a quibble of words, but as an economist, I would say they are still profit-maximizing given constraints. It's just that the constraints are slightly different because their board members are also going to sit, not just in the boardroom, but in the dining room and in the wedding hall and so on and so forth. When I model them, I would still think of them as profit-maximizing as a firm, but their constraints are, of course, different. 

The second part that you added that is super interesting, is that they don't give political contributions the way we expect a firm to give. They tend to reflect the views of a patriarch in a family. It's a little bit more like individual campaign-contribution giving, which it tends to be more expressive than explicitly profit-maximizing. First, is that a good way to nuance that distinction?

Also, do we have evidence of family firms behaving this way outside of political settings where the passion or the preferences of the patriarch or the elder members of the family are very visible, even in how they conduct their business or which markets they want to approach or who they merge with, or so on and so forth?

PURI: Absolutely. I think you've hit the nail on the head with thinking about the distinction between the corporation and the individual. Just to take a step back, the way scholars have looked at campaign contributions and money and politics, campaign finance, you think about the distinction between why an individual might participate in making donations to political campaigns, versus why a company might make a donation. 

The idea is that if you and I were to make a donation to a political party, why we are donating is probably not a quid pro quo material consideration. You and I, we might like a political party, we might like a particular ideology, something like that. Maybe we're trying to boast to our friends that, "Oh, I got invited to this fundraiser." 

I think the expectation is that companies tend to be more opportunistic, is what I'm calling it. You could call it strategic, you could call it pragmatic, different synonyms to describe this behavior where they're really thinking about who can give me the greatest return on my investment.

You want to think about political donations as an investment for companies and more a consumption good for individuals. The question that I'm coming to with the family firm is, what happens when you really can't distinguish between the corporate form and the individuals that are behind the company? As you said, the way you want to think about a family firm is you want to think about concentrating a lot of discretion and agency in the hands of a few individuals, typically the patriarch. What happens then?

How should you think about this company, which is a registered entity, it operates legally like a company, but it acts in many ways like an individual, or it could? The question is what happens in this case?

Distinctions Between Family-Run and Non-Family-Run Firms

RAJAGOPALAN: Family is speaking in one voice at the very least, if not an individual.

PURI: Yes. There's plenty of examples of family dissonance, but I think on average, a family business will come together as a family unit. 

That's to speak to the distinction between firms in general versus individuals. The family firm sits awkwardly in between these two categories. The family business is not a new field of study, especially in management and corporate finance. In political science, less so. There's, in fact, very little said about how family businesses participate in the political arena, but there's quite a lot that has been said about how family businesses operate in the core strategic decisions that a company might make.

Simple things like, why should you pass on the reins of your business to your son— typically son, could be daughter, but invariably it's a son. Why is that? Managerial genes do not really pass on from one generation to the next and so there's folk wisdom that it takes three generations, and the family firm whittles away. That choice is not necessarily a profit-maximizing or an optimal strategy in that sense. 

Some really great work in management—there's this world management survey—Nick Bloom, John Van Reenen, Raffaella Sadun, and a whole large set of co-authors—they've taken management very seriously. What they find is that family businesses tend to systematically make suboptimal management decisions in deciding to enter new businesses, in delegating to employees, things like that. Economists have studied this quite extensively, and they've looked at how family businesses in developing countries tend to not grow as fast. One of the reasons for that is there's a trust deficit. You want to keep operational decision-making in the hands of the trusted few.

RAJAGOPALAN: Control.

PURI: Precisely. In your dogged focus to keep control, you might not be willing to trust and delegate to professional managers, to hired employees. This creates a wedge in performance. Even in the case of India. 

Manaswini Bhalla at IIM Bangalore has done some fantastic work on this. She has a bunch of co-authors and a bunch of different projects. Specifically, you can see the behavior of these patriarchal firms that they're more likely to merge with one another. You see worse performance for shareholders.

Lack of diversity in the corporate boardroom produces worse financial outcomes for firms. It echoes very classic work by Gary Becker on the economics of discrimination: What happens when you decide to discriminate? You might be leaving money on the table, you might be missing out on opportunities, things like that. That's the broader literature that I'm trying to join.

RAJAGOPALAN: I think another thread through this is a greater level of risk aversion and maybe a little maybe too much skin in the game is another way of putting it. Managers and experts brought in from outside are going to have contracts and golden parachutes and so on and have less skin in the game. As we know now, they're more short-term in their thinking, and they'll get hired by someone else. 

Whereas in a family firm, especially when all earning members of the family are employed in the same thing, you may be a little bit more cautious, a little bit more risk averse, because it's not going to be one person losing their livelihood. It's probably most of your family's wealth and intergenerational wealth which may tank with a couple of bad decisions.

Another thing I find fascinating about families, and I grew up in New Delhi, as you did in part, you have weddings, which are like mergers between two business families. They'll announce a joint venture, I am not talking about the baby. I'm talking literally about a joint venture coming out of the wedding. It's funky, what goes on in some of these smaller Indian family-held firms.

PURI: Absolutely. You're completely correct to point out that it's not [fair] to say that family businesses are just a suboptimal economic outcome. In many ways, Tarun Khanna has especially written about this stuff, it is the optimal decision. Family businesses, we know, tend to last longer because of that longer time horizon, the more risk aversion. 

It depends on what you want. Certainly, you should think about them as distinct in their orientation and their objectives. Once you recognize that they have differences in orientation and objective, how does that then produce different predictions for a political gain, is what I'm trying to study.

Political Donations and Corporate Social Responsibility (CSR): Overlap or Distinct Strategies? 

RAJAGOPALAN: What you find is that they tend to give to a single party. They tend to have these connections that are a little bit more long-term. A lot of it is based on the ethnicity of the person leading the party, or most of the cadre of the party, and the family's ethnicity, caste, and so on. 

I'm wondering if there's a slightly different way of interpreting the same results. One possibility I see—this is especially coming from your section on political lost causes—is this a way of old-school CSR philanthropy? Which is, there's a tax break that comes with donating to a political party. We're talking about publicly made disclosed donations for most part in this paper, and it's tax exempt. Maybe this is not so much a lost cause or kinship. It's just you're going to give some money away philanthropically, you might as well mix philanthropy with some future political connections and potential, and that's how you give it away. 

If my hunch is right, then you should see a clean break in 2014/15, when the union government mandated 2% has to be given away in CSR money with a criminal penalty and jail time, if I'm right about that change in rule. Do you think something like that is going on there? Did you at all try to look at CSR? Because you do mention the CSR literature in your paper. I don't see this clear test, but I imagine that could be done in the future.

PURI: That's a really good idea. I think you are very right to bring up and invoke the CSR literature because when I talk to these businesses and I ask them, "Why did you make a donation?"—of course, everything's off the record—the way it is described echoes a lot of how they talk about corporate social responsibility. It is not, “What can I get from this person?” It is a lot more like, “Oh, as an upstanding citizen and as a believer of democracy—and sure, I may have some preferences, and I have social ties with some person.”

One second- or third-generation business owner once told me that the least controversial CSR decision that a company can make is to just give to the local temple. That's a very interesting, very profound point because that is the channel through which you embed these family businesses in a broader community network. 

Very similarly, another very common response to the question of, "Why did you donate?" was something very much like, "Oh, my daughter's father-in-law gave me a call and I wanted to look good in front of him." That second part wasn't said, but it's obvious that that's probably the reason, and there's nothing surprising here. It is just that these are individual motivations that are coming forth, and there's a tax break associated with making the donation, so you do that. 

RAJAGOPALAN: Same as giving away philanthropically. What I mean is the tax break is not different.

PURI: Yes. Exactly. In fact, I'm starting to work with these folks—Aline Gatignon at Wharton and Christiane Bode at Imperial. They're management scholars, and they've looked at the CSR spending of companies in India, and it actually looks very similar. You see these very large companies are making these strategic bets across multiple different buckets of CSR spending, whereas a lot of companies are just choosing one thing, maybe it's education or something like that. They're acting more as you and I when we make a charitable donation. We might give to a local school or something like this.

RAJAGOPALAN: My sense is it can tease out that difference between the strategic family firm decision versus the expressive political decision on the part of the patriarch. Because if this is true, you should at least see the “lost causes” part disappear after 2014, or at least reduce. The rest of it remains.

PURI: Yes, I see.

RAJAGOPALAN: I think you might be able to tease out the difference even more sharply in the original setup of your research design and illuminate a little bit more about your findings.

PURI: That's a really good point. I will take note and report back to you how companies think about it from more of a portfolio perspective, like CSR spending versus political spending, and if there is a hedging or a switching strategy or something like that. I think that sounds pretty fascinating and very doable as well.

The Hidden Side of Campaign Contributions

RAJAGOPALAN: The second question I'm going to ask you now—this is a little bit harder. Of the 20-odd years that you look at, there's a short period of about four years which is electoral bonds. Let's leave that aside. Is it possible that they give the disclosed amounts to their caste and kin networks, but actually they do have a portfolio hedging approach? They're just giving cash to the parties that don't belong to their caste networks because, at the end of the day, they have to show their face at the local temple or the local mosque and at the weddings. They have to attend PTA at their children's school.

This becomes really important. Anyone can look at the disclosed amounts, so you're going to give only to people that are less controversial and save face in the community. Is that a possibility? I especially asked this because before electoral bonds, so much of the political donation was just done in cash because it's anonymous. That was the protection. 

PURI: You are 100% correct. In some ways, it is the tip of the iceberg, but in some ways, it's just a different iceberg. You want to think about these as different categories of political activities of firms. The disclosed nature of these donations do very much, I would guess, play a role in how companies are thinking about it. I'm going to even further make your point, which is to say, because of the Supreme Court ruling, you can actually see the behavior of companies in the electoral bonds, the more covert space. They do look different. There's a lot more multi-party giving. There's a lot more higher-frequency and greater amounts. Electoral bonds are probably the arena of strategic politics where disclosed donations are probably…

RAJAGOPALAN: Or used to be before they mandated the disclosure.

PURI: Certainly, which acted retroactively.

RAJAGOPALAN: Exactly. I don't think we'll see that in the future.

PURI: Yes, that's right. It's very nice. You can see that this disclosed channel tends to look a lot more expressive, whereas the undisclosed—what happens under the cover of darkness—tends to look a lot more strategic. That said, I'm going to go even further and say there's very interesting work that has been done on the role of local politicians or regional, even MPs and MLAs. You want to think about them less as legislative agents and more as local fixers.

RAJAGOPALAN: Yes, brokers. Exactly. The power brokers locally.

PURI: Exactly. I think Alexander Lee at Rochester has some really interesting stuff which makes this point. We can observe companies making donations to political parties. You really need to have a channel through which a donation to a political party actually gets the tax man off my back or something like this. It's a few steps away. What is much simpler probably is just bribing the tax man right away, or someone, or maybe that MP or MLA. That's not going to be visible in this very formalized expressive donation channel. A response to this might be, okay, so why did you waste your time studying this useless channel? 

RAJAGOPALAN: That's not the response to this, but go ahead.

PURI: I think it's a reasonable response. At minimum, I would say, one, it's a fairly large amount, so I think it is worth looking at. Also, studies on campaign finance have studied campaign contributions, because it's the most visible form of politics. If the conclusion is, “hey this is not where the action's happening,” that is actually a very profound and deep point to the literature, that this is not where the action is happening. I think all in all it justifies why you want to study this, and I think it makes a pretty deep point that maybe quid pro quo politics is happening in other arenas.

RAJAGOPALAN: I am a little bit more concerned over what it does for your results in this particular paper, not that you shouldn't study formal campaign finance. It's more that where you land by studying well-established disclosed data on campaign contributions is: It's less opportunistic, more driven by kin networks, caste networks, long-term relationships. 

What if when you see the rest of the iceberg, it's like, oh, these guys are doing the same thing that regular firms do. They're hedging their bets. It's just because they're a family, and they are in a particular community, and they can't just up and leave and go to another Fortune 500 company in another city tomorrow if things go south. They need to be embedded in the local politics of it, and therefore they will give a lot of their giving. They have the same portfolio approach as any management-run firm. You just don't see all of it, because they need to get their daughters married, and they need to be able to attend family events and things like that. That's where I'm going with this.

Does it undermine in any way how sharp the differences are between management-run firms and family-run firms? Because this part we don't see, but if it's established that they will give, will they hedge, will they have a diversified portfolio?

PURI: It's certainly possible. The results, I think, in that case make the point that family businesses are constrained by more factors, perhaps. You are learning something about the reputation and social embeddedness and how that leaves an imprint on how companies need to operate. Even at a minimum, if you just point out that, look, actually the political hedging is simply happening in under-the-table channels, it tells you the set of things that a company is willing to disclose and share publicly.

RAJAGOPALAN: Absolutely.

Ethnic Identity in Relation to Expressive Giving

PURI: I think that itself is quite informative because we do have a sense that companies like to manage their reputation, but we don't know too much about how ethnic identity becomes one of those dimensions through which companies are looking to manage their reputation. It's usually something about being a good steward or something like that.

RAJAGOPALAN: I think it's not just ethnic identity. I think I read this in your paper, but I might have read somewhere else on how Chick-fil-A is closed on Sundays. That's a religious-ethnic dimension. But if you live on Twitter the way folks like me live on Twitter, you see there's a very serious red team–blue team division. Capitalists coming out and saying, "We endorse so and so for these reasons, and it's got to do with our tech manifesto,” or AI safety, or something like that.

We don't just care to hedge our bets, but we also care about expressive voting in a very sharp agenda politically not just driven by the firm. We are going to see this beyond family firms and also beyond very simple caste lines. Overall, I think what you're doing is hugely informative and very helpful, but it's helpful to tease all of this out in the Indian context, if you know what I mean.

PURI: Absolutely. As any good academic, you're supposed to think about: What is your contribution? Some scholars have looked at the role of ideology and partisanship in US corporate politics, which is exactly what you're talking about. If you go back a couple of decades, the lobbyist for Disney once said, “Mickey Mouse is neither Republican nor a Democrat,” but in today's era, Mickey Mouse might need to be either a Republican or a Democrat. 

RAJAGOPALAN: Apparently, Michael Jordan refused to endorse the candidates in his home state. It caused this huge political row, and that was along race lines, not red team–blue team, but that was another big one.

PURI: Yes, and yet last night Taylor Swift came out in support of Kamala Harris. There certainly have been ideologies playing this role in America, and the question is what is that cognate in another context? I think the deep cleavages that define politics in India, the durable cleavages, often tend to be along ethnic identity lines. You're seeing this play out at the corporate level.

RAJAGOPALAN: It's fun to look at it from the point of view of family firms because we also have so much marriage endogamy, right? The interaction between caste, religion, language concentration in expressive preferences with marriage endogamy and how that plays out in the boardroom becomes a super useful device. 

Challenges in Measuring Quid Pro Quo Arrangements

I have a couple of questions now on the other side which is the quid pro quo side. We're talking about [how] these firms give this money away. Presumably, they're getting something or they're doing this purely for expressive reasons and not getting something.

The quid pro quo that you look at is government contracts which are given both at the union level, state level, in some advanced states at the local level, and so on. The second kind of quid pro quo is loans on favorable terms from public sector banks. Both of these quid pro quo aspects are very well-established in the economics corruption literature. 

My question here is, is this a good measure or is this again just the tip of the iceberg? With public sector loans especially, you need union government blessing for that. That's much more concentrated in the hands of a few bureaucrats and politicians—government contracts much more at the union, state, and local level. That's one part of it. Are we misunderstanding something because the government public sector bank didn't give a favorable loan? Maybe that wasn't the point of the donation in the first place, but that doesn't mean it's a lost cause or purely expressive. 

The second aspect of that you partially touched on, which is the fixer nature. In Indian political economy, business is so much entangled with this “license permit Raj.” Even though it was formally removed for industrial licensing, you have labor inspectors. You have this enormous machinery of tax inspectors and tax auditors and so on. Now you have environmental permissions and clearances. Sometimes those work at the Gram Panchayat level. Is that the quid pro quo that's taking place and also why it seems more local and more kin-based?

PURI: Yes. I will say that, firstly I think you've hit on the issues very, very nicely. I think it is a moving target to figure out what is a quid pro quo. I think the way people approach the question of corporate politics is by searching for quid pro quo. You assume it and you're looking for evidence in many ways. Now, it's actually more challenging, than it is. Certainly, in the American context, it's very ambiguous what the returns are to corporate political donations. In other countries, some papers will find more smoking-gun evidence. 

It is a challenge to figure out what it is that companies are after because you're right, there are so many other things that they might be after. What you're restricted to is the set of things that you can get good measurements on. That's the nature of empirical research. I was able to get loans from state-owned banks, and I was able to get government procurement contracts and try to stitch those things together. I didn't find too much evidence for it.

Yes, there's an additional set of things like regulatory forbearance, maybe some very micro-level get-the-taxman-off-my-back kind of things. There may be some clever ways to do this scraping newspaper data or something like that. That's also got its own pitfalls.

RAJAGOPALAN: You won't find the dog that didn't bark. That's the problem because if you look at the electoral bonds evidence, what it shows is they make criminal prosecutions go away. Like with Future Gaming, Megha Engineering, these are the biggest donors, and it's basically a quid pro quo for not prosecuting. You're not going to find evidence of a prosecution that [didn’t happen]. There's something else going on there altogether, which is much harder to get in official or unofficial data.

PURI: That's true.

RAJAGOPALAN: I don't think it's a matter of scraping. I think it's just a matter of this is a very complicated political economy.

PURI: It's fundamentally—some things are unmeasurable and then some things are hard to measure. I'll also admit that absence of evidence is not evidence of absence. You don't want to hang my hat on this particular result. I would add, I think the way I want to make my case that this is actually not about quid pro quo. 

The way scholars have tried to make the case that companies tend to participate strategically is in one of two ways. One, you can look at the intent. You can say, okay, if you see more of this strategic behavior, either switching when the incumbent switches or hedging across parties around election times because of uncertainty, all of this is ex-ante strategic behavior. You don't see the returns for that. That's one way. That's strategic in intent. 

Then there's another way which is strategic in outcome, which is you look at whether the donations actually resulted in access to loans, access to profits or contracts or something like that.

My argument is to say, in the first part, we don't find evidence of ex-ante strategic intent. We also don't find ex-post or at least I don't find ex-post evidence for strategic outcomes. 

I'm going to add a third point, which is to say that companies that have greater family involvement on the corporate boards, which we're calling at the extreme, a family business, they tend to make donations which are much smaller check sizes. It really makes the point that these are probably token donations.

Or if you believe that there are massive returns, we end in this Tullockian puzzle, which is: Why so little money in politics? How effective is the money from these family firms? How effective and what is the great political multiplier that these guys have that they're able to give 1 crore or 10 lakh donations and then suddenly manage to get multifold returns as well?

RAJAGOPALAN: I don't disagree with anything you said. I completely agree with you, but I still think to then make the leap and say, this is not strategic or opportunistic but something else altogether, you need evidence of that something else altogether. I'm really hoping that the CSR, the substitution, or something will come through to make that case a little bit stronger.

I honestly think there's going to be no smoking gun. On this, you're absolutely right. I think it's just a question of triangulation. What is the case where we can triangulate the best and give the strongest evidence and so on, so forth? Do temple donations increase in that area and things like that, would be interesting. 

The Impact of Demonetization on Political Donations

Another question I had for studying the money in politics is, do you see a sharp break in 2016 with demonetization, because that's within your time period because their money disappears. If I remember my demonetization nightmare correctly, there was no limit on how much a political party could deposit in a bank, though there were limits for individuals and businesses.

PURI: I actually don't see too much of a sharp 2016 effect in my disclosed data. I was expecting to see a sharper deviation because the story in my head was, if a company has been wrongly served by—these are SME businesses in India. They have great exposure to the informal sector that was decimated by the demonetization shock. Surely, they would wrench their money away and support the opposition or something like that. You don't really see that. You don't see a movement away to supporting the opposition at all.

Assessing the Reaction to the Information Shock from Mandated Disclosures

RAJAGOPALAN: If you have the time, I would love to talk about your other paper, which I'm obsessed with. First of all, I must congratulate you on how quickly you got this done. You are looking at how the Supreme Court mandating disclosures on anonymous political donations to electoral bonds impacted publicly listed companies. Except this disclosure came a few months ago in March, and we are talking in early September, and you've had this paper done for a while. Congratulations on being maybe the most productive person working in this area. 

This is a case where for six years, the electoral bonds were a complete black box and anonymized. The only party who knew who gave and to whom was the government because they are owners of the State Bank of India, but the public and the media—no one else knew who was giving to whom. What you find is that the Supreme Court judgment saying you have to have transparency and give details of which contributor gave how much money and to which party was a huge surprise. No one saw that coming given the state of our judiciary.

What you look at is how it impacted publicly listed companies, especially in the immediate aftermath. You find that the entire system experienced what one would call an information shock—information we didn't expect to happen. This was not exactly a leak but a mandatory disclosure which came exposed. 

You find that as a result of this information shock, they underperformed by 1.5% of all these publicly listed companies that gave cumulatively. It's about 88 companies, and the loss is pretty big. It's about $9 billion in market capitalization, which, just for a point of reference, is over five times the amount raised in total by the political parties and over 400 times the total amount contributed by these 88 companies. The information shock has a huge impact for publicly traded companies, which one presumably doesn't see in privately traded companies. Did I get this roughly right?

PURI: That's right. Yes.

RAJAGOPALAN: What is the underlying mechanism at work here? Because this is a very unique case of a one-time mandated disclosure. We're not going to see this again. From what I understand, your story or explanation for this is that this is just information shock, which has made a dent in the reputation. There's this drop in the traded value, an abnormal drop for about a week, and then the effect goes away.

What is the mechanism at work here?

PURI: It's a very strange shock. The Supreme Court mandating retroactive disclosure of political activity is--

RAJAGOPALAN: Welcome to the Indian judiciary, Sukrit. 

PURI: I know. You'll be talking about it for a while, and it never ceases to surprise you. It never ceases to surprise market participants either. 

I would say that the puzzle, in the sense that frames this piece, is we know that companies benefit from political connections. This is something that you know both colloquially, but also in scholarly literature, we just see companies that have political connections tend to perform better. 

On the other hand, we also know that companies like to hide their political connections. This is a little bit strange, so there's some work on how companies might want to go through shell entities or put their donations through these 501(c)(3)s in the American context. For years we knew about the electoral bonds as an anonymous channel. We knew that companies were participating, but it always raised the question: If companies benefit from political connections, why hide them? You're leaving money on the table. There's got to be something there that explains why a company is not interested in disclosing their political activity. There's got to be some value in hiding your political activities.

RAJAGOPALAN: A question there is: Just because they are not the only people who are involved in the decision to disclose or not disclose? The way you've set it up is, it's the choice of the company, but what if it's the choice of the receiving party, which is the political party that does not wish to disclose this? 

Company disclosing this is going to create a bit of a mess on both ends because then it's going to seem quite obviously corrupt, and the people they're hiding it from are not necessarily investors or even consumers. The people they're hiding it from are voters that companies don't presumably care about, but the parties care about. 

PURI: I think there's the institutional rules of the game that these companies are taking the fact that you have this channel—and in some ways, it's a very simple channel—to make a donation to a political party. If it happens to be fully anonymous because the political parties want it to be fully anonymous, then there's nothing you can do about it. You can't really blame the companies.

I would say there was always the choice that was available because the disclosed channel already existed. The way to cut a cheque to give to a political party through the disclosed channel was never any harder than it was to go to the State Bank of India and deposit a cheque there either. It was never really more or less cumbersome. It is a choice about whether you want this to be disclosed or not.

RAJAGOPALAN: No, but doesn’t the accepting party have a say in how they want the money? When you go to a store, they're like, "Are you going to pay by cash or credit card?" It's not just my decision, it's also their decision how they wish to be paid.

PURI: That's true. I guess there are some companies that do make both disclosed and undisclosed donations and some companies that only make undisclosed donations. It's a little bit hard to disentangle who is making the choice in this sense. I'll agree with you there. I think the value of the setting is that you could see what the market response is.

RAJAGOPALAN: Absolutely. I don't disagree with any of the other stuff. To me, it doesn't seem like that much of a puzzle that companies want to hide this because clearly there's something larger at work going on politically that does want to hide the fact that there are such large sums of money involved in politics.

PURI: The puzzle is a funny one because it's very obvious to a layperson. The literature produces a puzzle because you know that companies benefit from connections. You know that companies want to hide connections, but it does leave, "Why?" You're leaving money on the table by not revealing your connections. 

Clearly, there has to be a wedge there, there's got to be something that benefits companies by having this undisclosed anonymous channel. There've been a couple of studies, which look at these surprise leaks and things like that. There are very few of those kinds of studies. This is the biggest.

RAJAGOPALAN: They're not across the board. It's a leak for a few companies. It's like the Panama leaks or something like that.

PURI: Exactly.

RAJAGOPALAN: It's the very specific companies who happen to be in that jurisdiction or who happen to have those bank accounts. This is a systemic disclosure across all political parties and all electoral bonds in India.

PURI: It is the channel through which campaign finance takes place. It's not, "Oh, this was a few companies giving through a think tank,” or something like this. It was, "This is the primary channel of campaign finance, and you retroactively revealed who made donations when you promised anonymity." It's an incredible moment of a government going back on its word. You don't get too many of those. If you can, you should run difference in differences.

RAJAGOPALAN: Well, we have retroactive taxation. They recently went back on property indexation. We do this all the time, Sukrit.

PURI: That's true.

RAJAGOPALAN: Just not at this scale and just not for important politically connected people. 

PURI: That's true. India is a very fruitful opportunity for people running difference-in-differences analyses.

Understanding the Reputational Impact of Political Donations 

RAJAGOPALAN: A couple of follow-up questions. One, the paper is super fascinating. You land at the conclusion that because there is no lasting impact, this is reputational cost, and it goes away. But the reputational costs have got to go on longer. This is, again, why I go back to the earlier question I had about the model. Who are they signaling to? The reputational costs with the investors, you're right, that can go away pretty quickly. The investors assimilate that information on whether to create that stock or not. 

If the informational value is broader to the community, like Tatas are a trusted name, but we will no longer buy their stock kind of thing. Or to big mutual funds who will choose not to hold something in a particular portfolio, those reputational costs have got to last longer. Which makes me wonder if this is just a reputational shock question or if there's something else going on there. 

As an economist, there are two ways of thinking about it. One is it's pretty straightforward. This is a very efficient market hypothesis sort of way. The market always assimilates all the information and at that point incorporated it. There was a little bit of an adjustment, let's say seven days, and they incorporated that information, and we're done. 

Another way of looking at it is that there's something else that is going on. Which is it was never really about reputation, but about something else altogether. There was a waiting period before which the investors could understand, "Hey, is the sand shifting beneath our feet? Oh, it's not, okay, let's continue with this investment."

PURI: I think maybe it's a question of just labeling it. I think what you've described is right because when I talk to investors and market participants and I ask them, "Hey, how big of a deal was the electoral bond story?" Because the journalistic account was, “It's quite big,” and we were all [paying] rapt attention seeing all sorts of news updates about that.

The investor community, it seems like—

RAJAGOPALAN: They knew.

PURI: One view is that they knew. Another view is that they shrugged it off because, again, we come back to a very funny [question]—this is Gordon Tullock again—which is: “Why so little money in politics?” The actual amounts raised are not that much. For instance, the amount raised, or I guess The New York Times reported about—it's like $1.7 billion was revealed through these electoral bonds, which is a big number, certainly. How costly was the elections in India 2024? $14 billion. If that's the case, then $1.7 billion raised through electoral bonds doesn't seem that much. 

Now, of course, there's accounting questions in all this, and I'm not trying to minimize the fact that this is a very important and critical channel, but for a company's balance sheet, the actual amounts that they made donations, it's not that material. I think for publicly listed companies, the investor community ultimately shrugged it off in the long run because it didn't seem to be that material.

RAJAGOPALAN: If that's true, it shouldn't even last seven days, right? It takes a day to check the balance sheet, and most investors presumably already know, and these markets move really fast.

PURI: That's true. I don't have again, great evidence for this, but it seems like trading volumes went up as well, which would suggest that retail traders are probably the ones responsible. We know that India has had this great Robin Hoodification of equity markets in India over the last, call it five years. You see a lot of retail trading activities.

RAJAGOPALAN: Basically there's this constant chatter in the media, in the newspapers, on TV news for TRP reasons. They are constantly trading and updating themselves. Whereas the institutional investors—you barely see a blip.

PURI: Precisely. We know that retail traders are more sensitive to news coverage. In my paper, I do a little bit of news coverage analysis, and you can see that the way the coverage is happening, it's a “scandal effect.” If you're someone who is watching the news and trading your portfolio, you might think, "Okay, these companies are bad companies." Then the institutional investors are sitting there being like, "Oh, great, I can buy this cheap." It takes a week to sort itself out. It is a reputational story but in the sense that it's a short-term scandal.

RAJAGOPALAN: Two follow up questions on the scandal nature: Is there a difference between publicly traded companies or conglomerates that also have a stake in media houses and newspapers versus those that don't? That would be question one.

The follow-up question is: Do the people who've been outed increase their advertising in said newspapers and TV news shows? Because then that would be softening the effect, like that's the quid pro quo. We're going to advertise or not advertise, and that's the stick and carrot through which you can improve the reputational consequences and not have that much coverage in the media and so on.

PURI: That's a really good question. On the first one, the Adani Group's purchase of NDTV immediately comes to mind. But one thing to note is, the Adani Group was not one of the companies that was revealed. Even though the day before the revelation was supposed to happen, this Adani stock price fell 7% in anticipation, but it turned out they were actually not on the list at all.

RAJAGOPALAN: Or it’s nothing they are publicly associated with. They have so many shell companies that we, at this point, just can't keep track of it.

PURI: Yes, this is—

RAJAGOPALAN: Complicated.

PURI: This is Junior Varsity play. This is not for the big guns.

Is Uncertainty a Factor?

RAJAGOPALAN: I'll tell you what my hunch is, and I wonder if there's a way that you can test for it. My sense is the reason it goes on for a week and then stops is because of judicial uncertainty. If you look at the scandals that happened in the UPA government, the Supreme Court response was to cancel a bunch of government commitments and contracts. The licenses for 2G and all of those things got canceled. The coal licenses got canceled. That's going to have a huge impact. 

My sense is, the market was waiting to see if the Supreme Court says, "Now that we know this stuff exists, and we've opened the can of worms, now we're going to litigate every can, each worm." If you remember, both sides representing different political parties were pleading with the court, "Do not do this on a case-by-case basis." You can find this in the transcripts. My hunch is that the result, or the short-term effect, is driven by judicial uncertainty. 

I don't think there's a way to prove it here, other than maybe allude to transcripts and things like that, but maybe look at some earlier cases of 2G, 3G scams and see how long that effect persists. Because when this stuff gets outed, anytime there's a retroactive effect, it lasts quite long. In the case of Vodafone retroactive taxation, it's lasted a decade when it comes to private investment rates. I am genuinely surprised it only lasted a week, which means it's a combination of people already knowing this information and something else that we are missing. 

One plausible story is, it's the media theory that there's this overload of media. When the news cycle changes and these guys move on to something else, everyone moves on.

PURI: I think that's great. You've given me two or three great future research papers to work on. The persistence of political scandal. There are some interesting papers that looked at the Volkswagen scandal and things like that. The duration of those reputation costs is much longer. You're right, what explains a short-term thing versus a longer-term thing? I think it's an open question.

RAJAGOPALAN: The interesting thing is it's short-term across the board for 88 companies. I know you're looking at the cumulative effects and things like that. You find a difference between your original method, and then you do a synthetic control. The direction is the same, but the magnitude is quite different. What do you think is going on there? Is it just standard? For stock market prices, past prices are not good predictors of future prices? There is no way you can track this intelligently, especially in the face of everything that's changing, or there's something fundamentally different being measured in these two methods that I could not figure out?

PURI: Frankly, it's just different approaches to asking the same question. Each approach makes different assumptions and the operations of conducting that analysis is different. I can talk more about some of the differences that might be explaining this and might be helpful for listeners as well who are thinking about this. 

It's very typical to do a difference in differences, and then think about a synthetic control as a potential secondary and auxiliary test. The idea is with the difference in differences, your key assumption is like a parallel trend. The whole game is about figuring out what is the counterfactual. 

We have these 88 companies that are your "treated companies" that they've been treated with this information shock. Then now you’ve got to figure out, what is the right control group? What is the counterfactual group? In the difference-in-differences setting, you need to basically look at the pre-period. You want to see in the pre-period that there isn't a systematic difference in stock price performance, so you can isolate the effect to the information shock that happens on, call it the 14th of March. 

The way you do that in the difference-in-differences setting, [or] what I do is include a bunch of controls to get at [it] very transparently. The nice thing about this difference-in-differences method is you're very transparent about, “here are the set of controls that I think allow you to get at the counterfactual.” In some ways, it puts you in the position of a portfolio manager, because you're like, "How do I think about stocks?" I buy bucket stocks in the categories of size and leverage and profitability, industry. Those are all ingredients that go into the difference-in-differences control measures that let you get to the parallel trends. 

The synthetic control method is a little bit different. You almost ensure parallel trends by looking at just the stock prices of all the companies. You say, "Okay, what is the set of weights on the non-treated companies that basically mimic the behavior of the treated companies?" You don't take this portfolio manager approach, and you're not thinking transparently, “what are the right set of controls?” It's always data-driven, but it's a little bit of a black box to figure out, "I actually don't know why there is X percent weight on this control company." What you end up doing is, you have a very good fit in the pre-period, but now you’ve got to think about how long is the pre-period that you want.

There's a fit question. There's a fit benefit to the synthetic control method, but there's a transparency benefit to the difference-in-differences method, and you can take your pick between the two of them.

RAJAGOPALAN: It's not like fundamentally something else is getting picked up in the political economy of campaign contributions.

PURI: That's right.

RAJAGOPALAN: This is absolutely fascinating research. Thank you so much for sharing your work with us. I had great fun reading the papers, and lovely to see you again.

PURI: Thank you so much, Shruti. This is such a pleasure. Thank you so much.