Political connections and short sellers

Abstract

This study finds that politically connected firms, comparing with their non–connected peers, are less likely to be targeted by short sellers, especially during the periods of market turmoil. Short sellers’ avoidance of politically connected firms can be attributed to the implicit government guarantee, which significantly increases the target firms’ information complexity and decreases short sellers’ expected risk–adjusted profits. The absence of short sellers consequently results in less negative stock returns for politically connected firms as compared to their non–connected peers. Our findings extend Boehmer et al.(2010) by showing that the absence of short sellers may not necessarily indicate good news but can be attributed to the presence of political connections. This study sheds some light on the sources of market value of political connections.