Political Connections and Firm Value: Evidence from Close Gubernatorial Elections

Abstract

This paper investigates the impact of political connections on firm value. Politically connected firms are identified through the networks of university classmates and alumni among board members of public firms and candidates in close gubernatorial elections in the U.S. from 1999 to 2010. Our Regression Discontinuity Design framework provides evidence that political connections significantly and consistently enhance firm value. Firms connected to the winners experience an average increase of 1.36 percent in firm value over firms connected to the losers surrounding the election date. Our results are robust and consistent through various specifications, with different outcome measures and social network definitions, and across many subsamples. Political connections are more valuable in a state with a higher level of regulation, higher level of corruption, in small firms, in firms that rely more on external finance, and in firms with some activities in the politician’s state prior to the election. Firms connected to the winners invest significantly more in comparison to firms connected to the losers following the elections. Overall, our study provides evidence that political connections are valuable for firm value, even at the state level.