Betting on Hitler - the Value of Political Connections in Nazi Germany

Abstract

We examine the effect of close ties with the NSDAP on the stock price of listed firms in 1932-1933. We consider not only links between the National Socialists and executives, as was common in earlier work, but also with supervisory board members - whose importance is hard to overestimate in the case of German industry. One implication of our work is that, weighted by stock market capitalization in 1932, more than half of listed firms on the Berlin stock exchange had substantive links with the NSDAP. Crucially, stock market investors recognized the value of these links, sending the share prices of connected firms up as the new regime became firmly established. While the market as a whole rose after Hitler's accession to power, firms with board members known to favor the party (or backing it financially) outperformed the market by 5-10% between January and May 1933. We show that this finding is robust to a range of additional control variables and alternative estimation techniques.

Keywords: Political connections, stock market returns, market efficiency, Nazi party

JEL Classification: E60, G14, G18, N24