Out of Sight, Out of Mind: The Value of Political Connections in Social Networks

Abstract

Focusing on former university classmates among corporate directors and U.S. congressmen, and the regression discontinuity design of close Congress elections from 2000 to 2008, we provide robust evidence of the causal impact of social-network based political connections on firm value. The value of political connections varies across politicians, states, and firms remarkably more than previously reported. While connections to powerful senators increase firm value, a challenger’s election causes a weighted average treatment effect of -3.24% on connected firms’ cumulative abnormal returns surrounding election day. The paper’s finding stresses the importance of state-level political connections, especially in more corrupt states.

Keywords: Social network, political connection, close election, regression discontinuity design, firm value, state-level politics

JEL Classification: D72, D73, D85, G3, G10, G11, G14, G30, C21