Political connections, political cycles and stock returns: Evidence from Iran

Abstract

We examine the effect of political connections and political cycles on stock returns of listed companies in Iran. Using 1146 firm-year observations derived from firms listed on the Tehran Stock Exchange (TSE) for the period 2005–2017, we find that political connections are positively associated with firms' annual actual returns and annual abnormal returns. Presidential elections strengthen the positive relationship between political connections and cumulative abnormal returns. Transfer of power to the Moderation (Principlist) party in 2013 (2005) strengthened (weakened) the positive relation between political connections and cumulative abnormal returns. Several sensitivity tests show that the results are not materially different from the main findings. Consistent with the political economy perspective, the findings suggest that political connections in a centrally planned economy are valuable for both parties and they become even more valuable in election years. Moreover, consistent with rational partisan theory, results suggest that investors react to political uncertainties stemming from presidential elections and transfer of power, even in emerging market economies like Iran.