The Economic Significance Of Political Connections: Evidence From Indian Parliamentary Elections

It is fundamental for a corporate with an agenda of long-term wealth creation to manage political relations in as efficient a manner as possible. This paper creates another measure of political proximity for firms based on their asset price movements around the parliamentary election results. It uses this political connectedness measure over a range of event windows on 54 large firms chosen from Indian stock markets to analyze the process of asset-price adjustment. We find that firms in regulated sectors requiring government interventions witness abnormal returns around the election results day. Theseabnormal returns persist for a longer period when the elections reveal no clear winner. The nature of the abnormal returns depends on the perceived relationship shared between firm managers and winning political coalition. This paper adds to the existing literature by using a novel methodology and a country context with varying ruling coalitions over a broader range of election event windows to capture the dynamic nature of the firms’ political connectedness. In the process, our understanding of ruling coalition-strength induced business uncertainties for corporates improves. Our results also show that only a select few firms are capable of adapting themselves to changing powers in a vibrant democracy.