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

• Main Authors: DO, Quoc-Anh, NGUYEN, Bang Dang, LEE, Yen Teik, NGUYEN, Kieu-Trang
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2011
• Subjects: Social network; political connection; close election; regression discontinuity design; firm value.; Finance; Political Economy
• Online Access: https://ink.library.smu.edu.sg/soe_research/1322; https://ink.library.smu.edu.sg/context/soe_research/article/2321/viewcontent/PolDirFirmVal_11Sept2011.pdf
• Institution: Singapore Management University

This paper investigates the impact of social-network connections to politicians on firm value. We focus on the networks of university classmates and alumni among directors of U.S. public firms and congressmen. Using the Regression Discontinuity Design based on close elections from 2000 to 2008, we identify that 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. The effect is robust and consistent through various specifications, parametric and nonparametric, with different outcome measures and social network definitions, and across many subsamples. We find evidence to support the hypothesis that firms benefit more when connected politicians remain in state politics than when they move to federal office. Overall, our study identifies the value of political connections through social networks and uncovers its variation across different states and between state and federal political environments.