The (In)Visibility of Undisclosed Political Connections

Abstract

Despite a strong investor demand for firms to disclose information on political connections, mandatory disclosure requirements face considerable opposition. Motivated by the literature on firms’ learning from stock prices, we investigate whether private information acquisition can be a useful alternative to disclosure. Using a setting of corruption investigations, we find that investors, on average, are not aware that the firms they have invested in have ties to the officials under investigation, suggesting a lack of visibility of the connections. Only a small number of institutional investors acquire information on the connections and sell their shares in response to the investigations. We also show that the high costs of information acquisition and a lack of incentives for analysts to disseminate sensitive information they have obtained contribute to this lack of visibility and result in a significant delay in the price incorporation of material information. Our study contributes to the debate on mandating disclosure of political connections by emphasizing the importance of investors’ ability to privately acquire relevant information on political connections.

Keywords: Political Connections, Visibility, Corruption, China, Anti-Corruption Campaign, Information, Transparency, Institutional Investors, Retail Investors

JEL Classification: G30, G32, G34, G38, K40, M10, M41, M48, P37