DP5460 Sudden Deaths: Taking Stock of Political Connections

Author(s): Mara Faccio, David Parsley
Publication Date: January 2006
Keyword(s): political connections, sudden deaths
JEL(s): G3, H8
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5460

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 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 hometown, 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, yields a 2% decline in market value of connected companies. Our stronger results are likely due to the lack of a clear event in earlier studies, and lead us to conclude that previous estimates understate the value of political ties.