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The value of political networks: Evidence from a natural experiment

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Original languageEnglish
Title of host publicationExperiences and Challenges in the Development of the Chinese Capital Market
EditorsDouglas Cumming, Alessandra Guariglia, Wenxuan Hou, Edward Lee
PublisherPalgrave Macmillan
Pages130-149
Number of pages20
ISBN (Electronic)9781137454638
ISBN (Print)9781349560424
DOIs
Publication statusPublished - 28 Jul 2015

Abstract

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.

    Research areas

  • stock price, stock return, abnormal return, market reaction, event window

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