Political Connections and Firm Value: Evidence from the Regression Discontinuity Design of Close Gubernatorial Elections
LIEPP Working Paper
Paris : Laboratory for Interdisciplinary Evaluation of Public Policies
LIEPP Working Paper : 15
Political connection, firm value, social network, close election, gubernatorial election, regression discontinuity design.
Using the network of university classmates among corporate directors and politicians and the regression discontinuity design of close gubernatorial elections from 1999 to 2010, we identify the positive and significant impact of social-network based political connections on firm value. Firms connected to elected governors increase value by 1.36% on average surrounding the election date. Political connections are more valuable in a state with a higher level of regulation and corruption, in smaller firms, and in firms dependent on external finance. Firms connected to election winners invest more, earn better operating performance, hold more cash, and enjoy better long-term stock performance.