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Out of Sight, Out of Mind: The Value of Political Connections in Social Networks

  • Quoc-Anh Do

    ()

    (School of Economics, Singapore Management University)

  • Yen-Teik Lee

    ()

    (Department of Finance, Lee Kong Chian School of Business, Singapore Management University)

  • Bang Dang Nguyen

    ()

    (Finance and Accounting Group, Judge Business School, University of Cambridge)

  • Kieu-Trang Nguyen

    ()

    (SPEA, Indiana University)

This paper investigates the impact of social-network based political connections on firm value. We focus on the networks of university classmates and alumni among directors of U.S. public firms and congressmen. Comparing firms connected to elected versus defeated politicians in the Regression Discontinuity Design of close elections from 2000 to 2008, we provide evidence that political connections enhance firm value. However, the value of political connections varies in a more complex way than expected. While connections to powerful members of the Senate generate strong positive impact on firm value, connections to newly elected congressmen are less valuable to firms than connections to state-level politicians defeated in those elections. As a result, a director’s connection to an elected congressman causes a Weighted Average Treatment Effect on Cumulative Abnormal Returns of -2.65% surrounding the election date. Our results are robust and consistent through various specifications, parametric and nonparametric, with different outcome measures and social network definitions, and across many subsamples. Overall, our study identifies the value of political connections through social networks, uncovers its variation across different politicians’ backgrounds, and stresses the importance of state-level political connections.

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Paper provided by Singapore Management University, School of Economics in its series Working Papers with number 22-2012.

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Length: 53 pages
Date of creation: May 2012
Date of revision:
Publication status: Published in SMU Economics and Statistics Working Paper Series
Handle: RePEc:siu:wpaper:22-2012
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  1. Asim Ijaz Khwaja & Atif Mian, 2005. "Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market," The Quarterly Journal of Economics, MIT Press, vol. 120(4), pages 1371-1411, November.
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