• How Do Political Connections Affect Firm Value?

Abstract

This study investigates whether and how political connections bring value to firms. One way to examine this issue is to check the responses of abnormal stock returns and investor trading for politically connected firms before and after the event of presidential election. We further examine the impacts of this event on the value of firms connected to the winning and losing parties. Data on stock price and shareholdings around the 2008 Taiwanese Presidential Election are used in this paper. First, we find that the firms connected to the losing party exhibit negative stock returns, whereas the firms connected to the winning party do not. This supports our inning party hypothesis. Moreover, the defeat of the ruling party has a greater negative impact on stock returns than the victory of the opposition party, lending credence to our party turnover hypothesis. Finally, sophisticated investors who understand the value of political connections are more likely to exhibit trading direction consistent with the value change, supporting our political trading hypothesis. Clearly, political connections bring value to firms, and the evidence helps us understand how political connections affect firm value.

Keywords: political connections, short-term stock returns, investor trading, firm value