Sudden Deaths: Taking Stock of Geographic Ties
Purdue University - Krannert School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)
David C. Parsley
Vanderbilt University – Finance
ECGI - Finance Working Paper No. 113/2006
AFA 2008 New Orleans Meetings Paper
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.
Number of Pages in PDF File: 49
Keywords: political ties, political connections
JEL Classification: G3, G28
Date posted: January 13, 2006
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