Many firms voluntarily incur the costs of attempting to influence politicians. However, estimates of the value of political connections have been made in only a few extreme cases. We propose a new approach to valuing political ties that builds on these previous studies. We consider connected to a politician all companies headquartered in the politician’s home town, and use an event study approach to value these ties at their unexpected termination. Analysis of a large number of sudden deaths from around the world since 1973 reveals a market adjusted 1.7% decline in the value of geographically connected companies. The decline in value is followed by a drop in the rate of growth in sales and access to credit. Our results additionally show a larger effect for family firms, firms with high growth prospects, firms operating in industries over which the politician has jurisdiction, and firms headquartered in highly corrupt countries.
Here’s the original paper from SocialScienceResearchNetwork:
Bloomber & WSJ picked up this:
“To the extent that politicians favor inefficient (family) firms by allocating resources to them, long-term economic growth will also be reduced,” according to the paper. In addition, the authors found that politically connected firms “suffer a statistically significant decline in sales growth” and access to credit between the year prior to the sudden death and the year after.
Health Care Initiative : “Stock prices should be unpredictable; nobody can predict them,” Parsley said. “Yet we have a model that can predict stock returns.”
… It is possible, based on the results of the study, to stay on top of the obituaries, short some politically connected companies and walk away with a profit.