Political Connections of Russian Corporations: Blessing or Curse?

Abstract

This paper provides comprehensive empirical evidence on political connections of Russian corporations based on a sample of companies for the period 2011 – 2015, divided into subsamples before and after the events in Ukraine. Specifically, the study (1) evaluates how common political connections are for Russian corporate environment, and (2) investigates the impact of political connections on firm value through an event study. The research shows that 27% of Russian corporations from the sample had the top officials of Russia as directors, and 43% of corporations were found to be politically connected on the basis of either state ownership or directorship. Political connections are unevenly distributed among industries, and regulated industries are more heavily politicized. Aviation, oil & gas, and banking were the most politically connected sectors of the Russian economy. The event study analysis showed that political connections have a value-destructive total effect which is statistically significant and robust. Generally, the stock market responds to announcements of political connections with a drop in share prices by 1.34% on average within 5 trading days. Different groups of stakeholders exert different impacts on firm value. The most negative influence on firm valuation is that of politically connected owners. The stock market reacts to announcements of new politically connected owners with a drop in stock prices by 1.82% within 5 trading days, and with a drop in stock prices by 4.3% when the politically connected owners were individuals. The negative value effect of political connections strengthened after the events in Ukraine.

Keywords: Political Connections, Corporate Governance, Event Study, Russia, Stock Returns, Crimea

JEL Classification: G34, P34, P26