Political Connection and Stock Returns: A Longitudinal Study

Date01 February 2015
Published date01 February 2015
The Financial Review 50 (2015) 89–119
Political Connection and Stock Returns:
A Longitudinal Study
Sireethorn Civilize
The Securities and Exchange Commission of Thailand
Udomsak Wongchoti
Massey University, New Zealand
Martin Young
Massey University, New Zealand
A stock market should display informational efficiency and, therefore, should appropri-
ately reflect the value of political connections, if any value exists. Using a comprehensivedata
set that incorporates both obvious and less obvious political connections to firms in Thailand,
we provide a longitudinal study which shows that higher realized stock returns are systemati-
cally associated with political connectedness. Consistent with the view that such a relationship
provides economic rents, this finding is particularly prominent in more regulated industries.
The politically connected premium is higher for higher level political connections and when
the political bodies hold an equity stake in the firm.
Keywords: political connections, stock returns
JEL Classifications: G14, G34
Corresponding author: Udomsak (Jeff) Wongchoti,School of Economics and Finance, Massey Univer-
sity,Palmerston North, New Zealand; Phone: (646) 350 5799 #84053; E-mail: J.Wongchoti@massey.ac.nz.
We acknowledgeresearch supports from Suresh Oad Rajput.
The Securities and Exchange Commission disclaimsresponsibility for any private publication or statement
by any of its employees. This paper expresses the authors’ views and does not necessarily reflect those of
the Commission, the Commissioners or other members of the staff.
C2015 The Eastern Finance Association 89
90 S. Civilize et al./The Financial Review 50 (2015) 89–119
1. Introduction
A positive relation between political connections, economic rents, and firmvalue
is observable globally.1This being the case, we arguethat if political connections are
an important determinant of firm value, their existence, intensity, and characteristics
across firms should be systematically reflected in stock returns. Empirical evidence
to support this view is lacking in the finance literature. We test whether the impact of
political connections on firm value is evident in stock returns in Thailand. We further
examine whether the type of political ties, political bodies’ stakes, and industry group
play an important role in the magnitude of these relationships.
The research questions set forth above are difficultto address for several reasons.
First, a researcher needs to be thorough in identifying the political connections of
a corporation, both those that are obvious and those that are less obvious, in a way
that an active stock market investor would do when trading. Second, a long study
period is essential to avoid data snooping bias and to ensure that the findings hold
in the long run. Ready-to-use databases that address these two points are scarce, if
available at all. Third, to increase the frequency of political shifts in the sample, such
a study would ideally be carried out over a long-horizon period in an environment
where political powers often shift. Existing empirical evidence on the impact of
political connections on stock returns tends to focus on event studies surrounding key
political figures, or only covers short periods of time. For example, Fisman (2001)
reports stronger cumulative abnormal returns among companies related to former
President Suharto surrounding news about his health. Such study is conducted on the
Indonesian stock market during the 1995–1997 period and makes use of the readily
compiled “The Suharto Dependency Index.” Johnson and Mitton (2003) examine the
effect of a capital control policy on the stock returns of companies in Malaysia that
were strongly affiliated with Prime Minister (PM) Mahathir and Deputy PM Anwar
during the 1997–1998 Asian financial crisis.
To help counter these issues, we examine the stock market of Thailand (Stock
Exchange of Thailand [SET]), as it provides a useful and unique empirical setting.
As a primer, Thai firms are renowned for being strongly associated with cronyism
and constant economic rent seeking through political connections. These activities
are shown in the literature to create value, as will be discussed in a later section of this
paper. Furthermore, political powerchanges happen relatively frequently in Thailand.
In fact, none of the elected governments, except one, has completed a full four-year
term in its history.This implies that both Thai firms and their investors need to actively
keep updated with these value-related changes and consider them in their business
decisions. Detecting the political connections of a Thai firm represents an interesting
“catch me if you can” scenario. While Thai politicians haveto conceal their affiliations
1See, for example, Talmud (1992), Kroszner and Stratmann (1998), Sapienza (2004), Khwaja and Mian
(2005), and Goldman, Rocholl and So (2009), among others.

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