Political connection and firm value: an Indian perspective

Abstract

Purpose– The purpose of this paper is to verify existence of political connection of firms in India. For this purpose the paper first presents a theoretical model and then tests empirically the movement of stock prices during two state elections in India.Design/methodology/approach– The methodology is theoretical modelling where the paper applies the standard Cournot model of oligopoly. The paper then applies correlation and Wilcoxon Paired Rank Sum test to verify the results of the theoretical model by using data from the Indian stock market during the election results.Findings– The theoretical result states that some firms opt for political connection and some remain independent in an oligopoly. It also shows that political connection affects stock price. The empirical results find out that divergent responses of stock prices to the election results can be linked to politically connection.Research limitations/implications– The theoretical model is a simple two firm model and not generalized tonnumber of firms. The empirical test considers only two state elections and applies simple statistical test. The study is restricted to one country only.Practical implications– The paper has practical implications for stock market. It has implications for corporate governance and for political governance. This is important since political connection of firms has emerged as an important issue in India.Social implications– The paper is important as it addresses the issue of political connection of firms, which have ramifications for social equilibrium. In a democratic country like India any nexus between political party and firms may adversely affect not only corporate governance but also political governance.Originality/value– This paper looks at political connectedness theoretically in a federal structure, an issue not addressed so far in the literature. Second it considers not so discussed topic of market perception of political connection in India. The originality of the paper is that it presents a theory and also verifies the theoretical results with empirical test.