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

• Main Authors: DO, Quoc-Anh, LEE, Yen Teik, NGUYEN, Bang Dang, NGUYEN, Kieu-Trang
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: Social network; political connection; close election; regression discontinuity design; firm value; state-level politics.; Corporate Finance; Finance; Political Science
• Online Access: https://ink.library.smu.edu.sg/soe_research/1388; https://ink.library.smu.edu.sg/context/soe_research/article/2387/viewcontent/22_2012_OutofSightOutofMindTheValueofPoliticalConnectionsinSocialNetworks.pdf
• Institution: Singapore Management 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.