Political Connections as Liabilities: The Effect of Political Risk on Firm-Level Returns
55 Pages Posted: 20 Dec 2019 Last revised: 31 Jan 2020
Date Written: January 28, 2020
Firms around the world benefit from building connections with politicians. In this paper, I develop a theory of political risk to account for the conditionality of returns to political connections. I theorize that the uncertain status of public officials is a political risk that undermines the profitability of politically connected firms. To test this theory, I analyze how China's ongoing anti-corruption campaign impacts the returns of over 3,000 Chinese publicly listed firms. I find that firm-level returns to political connections decline dramatically following the start of the campaign. Additional analyses rule out other alternative explanations and provide evidence on the preferential benefits mechanism.
Keywords: Political Connections; Political Risk; Financial Market; Anti-corruption Campaign; China
JEL Classification: D3; P26
Suggested Citation: Suggested Citation