The value of political networks: Evidence from a natural experiment

Rent-seeking behavior is prevalent around the world, especially in emerging markets where the governance institution is weak. Although political rent-seeking behavior imposes negative effects on the national economy and the total wealth, firms still enjoy benefits derived directly from political connections. Previous literature provides evidence that political connections are valuable to firms (Fisman, 2001; Faccio, 2006; Faccio and Parsley, 2009). For example, Fisman (2001) finds that the stock prices of firms with a connection to Indonesian President Suharto dropped more than the prices of those without such a connection when bad news about President Suharto’s health was disseminated. Using worldwide data, Faccio (2006) documents that the stock prices of politically connected firms increase when a businessperson is elected as the senior government official. In addition, using a substantial sample, Faccio and Parsley (2009) examine the value of geographic ties in relation to the unexpected deaths of politicians and find that firms headquartered in these politicians’ hometown experience a 1.7 per cent decline in market-adjusted return. This chapter aims to extend the literature on political connections by examining the value of observed and identified connections through a natural experiment in China.