The (In)Visibility of Political Connections
50 Pages Posted: 9 May 2019 Last revised: 24 Jul 2021
Date Written: July 24, 2021
We study the extent to which market participants are informed about firms’ political connections when the connections are not publicly disclosed and how the market’s knowledge of undisclosed connections affects pricing efficiency. Using a sample of political connections that are ex post confirmed to have created significant benefits to their connected firms, we find that institutional investors on average know about the connections and abnormally sell their shares in the firms when the value of the connections is lost. However, their sales are not sufficient to affect the stock price, indicating that the connections generally are of low visibility to other investors. The price discovery of the loss of value of the connections is significantly delayed. Moreover, when the connections are subsequently disclosed by the media, price incorporation is slower for the connections that have been less visible to institutional investors. Our results suggest that lack of visibility significantly harms pricing efficiency of political connections.
Keywords: Political Connections, Visibility, Corruption, China, Anti-Corruption Campaign, Information, Transparency, Institutional Investors, Retail Investors
JEL Classification: G30, G32, G34, G38, K40, M10, M41, M48, P37
Suggested Citation: Suggested Citation