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The value of political connections in a multiparty parliamentary democracy: Evidence from the 2015 elections in Israel

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  • Lehrer, Nimrod David

Abstract

This study uses the 2015 legislature elections in Israel in order to estimate how the market evaluates political connections. Using the political connectedness of boards of directors and senior executives in all the public firms in Israel to identify political connections, the study estimates the impact of the electoral outcomes on the cumulative abnormal returns of firms listed in the Tel Aviv Stock Exchange (TASE) in the days following the elections. Results indicate that political connections had little impact on cumulative abnormal returns in the estimation period. However, some sectors reacted in a robust and statistically significant manner. In particular, gas and oil firms' stock prices showed a notably higher and positive abnormal return. While the effect of the electoral outcomes on specific sectors indicates that the Israeli stock market does evaluate political outcomes through asset prices, the market's lack of responsiveness to political connections after the 2015 elections could indicate that political connections do not carry financial value in the Israeli stock market. This unique result is attributed to the institutional and political system in the country.

Suggested Citation

  • Lehrer, Nimrod David, 2018. "The value of political connections in a multiparty parliamentary democracy: Evidence from the 2015 elections in Israel," European Journal of Political Economy, Elsevier, vol. 53(C), pages 13-58.
    • Handle: RePEc:eee:poleco:v:53:y:2018:i:c:p:13-58
    DOI: 10.1016/j.ejpoleco.2017.07.001
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    2. Michelson, Noam, 2023. "The revolving door of former civil servants and firm value: A comprehensive approach," European Journal of Political Economy, Elsevier, vol. 79(C).
    3. Bussolo, Maurizio & de Nicola, Francesca & Panizza, Ugo & Varghese, Richard, 2022. "Politically connected firms and privileged access to credit: Evidence from Central and Eastern Europe," European Journal of Political Economy, Elsevier, vol. 71(C).
    4. Faraji, Omid & Kashanipour, Mohammad & MohammadRezaei, Fakhroddin & Ahmed, Kamran & Vatanparast, Nader, 2020. "Political connections, political cycles and stock returns: Evidence from Iran," Emerging Markets Review, Elsevier, vol. 45(C).
    5. Chen, Shuo & Yan, Xun & Yang, Bo, 2020. "Move to success? Headquarters relocation, political favoritism, and corporate performance," Journal of Corporate Finance, Elsevier, vol. 64(C).

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    More about this item

    Keywords

    D72; G12; G14; G32; M12; O53; Event studies; Parliamentary elections; Political parties; Political connections; Asset pricing;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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