The Value of Political Connection on Firm Performance: A Natural Experiment from Political Events

Description

This project studies the effect of political connection on firm value using political events as a natural experiment. We focus on events that lead to the loss of power of political leaders, and examine how they affect the value of politically connected and non-connected firms. As government officials may be loath to reveal their relationships with private sector firms, they may use proxy. To unveil this, we collect names of individuals closely related to top government officials from reliable news. Afterwards, we trace out the firms managed/owned by these individuals. These firms are classified as politically connected. We then analyze the difference in the stock price reaction of politically connected and non-connected firms to the collapse of political leaders. Since the collapse means a dissipation of firm value premium for the politically connected firms relative to the non-connected firms, such events provide a natural experiment to measure the firm premium arising from political connection.