Sudden Deaths: Taking Stock of Geographic Ties

Abstract

Many firms voluntarily incur the costs of attempting to influence politicians. However, estimates of the value of political connections have been made in only a few extreme cases. We propose a new approach to valuing political ties that builds on these previous studies. We consider connected to a politician all companies headquartered in the politician's home town, and use an event study approach to value these ties at their unexpected termination. Analysis of a large number of sudden deaths from around the world since 1973 reveals a market adjusted 1.7% decline in the value of geographically connected companies. The decline in value is followed by a drop in the rate of growth in sales and access to credit. Our results additionally show a larger effect for family firms, firms with high growth prospects, firms operating in industries over which the politician has jurisdiction, and firms headquartered in highly corrupt countries.

Keywords: political ties, political connections

JEL Classification: G3, G28