Cross-Country Differences in the Effect of Political Connections on Stock Price Informativeness

45 Pages Posted: 13 Jul 2020

See all articles by Yuanto Kusnadi

Yuanto Kusnadi

Singapore Management University - School of Accountancy

Bin Srinidhi

University of Texas at Arlington - Department of Accounting; City University of Hong Kong (CityU) - Department of Accountancy

Date Written: January 25, 2018

Abstract

Using an international sample of firms from 28 countries, we document that there exists a negative relationship between political connections and the informativeness of stock price, as measured by idiosyncratic volatility (IV). This finding is robust to alternative regression specifications, sub-samples analyses, and concerns related to endogeneity. A more detailed analysis shows that out of the different types of possible connections, the connectedness of the owners is the primary driver of this result. Further, the negative association is only significant for firms in countries characterized by low institutional quality (i.e. corrupted countries, countries with low access to external equity markets, and countries with low media penetration). There is no evidence of any relation between political connections and stock price informativeness for firms in countries characterized by high institutional quality. Overall, our results show that although political connections exacerbate rent-seeking that weaken the firms’ information environments on average, the negative information consequences are compensated by the countries’ institutional quality.

Keywords: Political Connections, Idiosyncratic Volatility, Institutional Infrastructure

JEL Classification: G14, G15, L14

Suggested Citation

Kusnadi, Yuanto and Srinidhi, Bin and Srinidhi, Bin, Cross-Country Differences in the Effect of Political Connections on Stock Price Informativeness (January 25, 2018). Singapore Management University School of Accountancy Research Paper No. 2020-117, Available at SSRN: https://ssrn.com/abstract=3109232 or http://dx.doi.org/10.2139/ssrn.3109232

Yuanto Kusnadi (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore
+65 6808 5449 (Phone)

Bin Srinidhi

City University of Hong Kong (CityU) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

University of Texas at Arlington - Department of Accounting ( email )

Arlington, TX 76013
United States

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