Do firms harvest from political connections during general elections? Case of Pakistan
| Pages | 258-273 |
| DOI | https://doi.org/10.1108/JFC-02-2019-0022 |
| Date | 10 February 2020 |
| Published date | 10 February 2020 |
| Author | Ayesha Ashraf,M. Kabir Hassan,Khurram Abbas,Qamar Uz Zaman |
| Subject Matter | Financial crime,Accounting & Finance,Financial risk/company failure |
Do firms harvest from political
connections during general
elections? Case of Pakistan
Ayesha Ashraf
Department of Management Sciences,
COMSATS University Islamabad, Sahiwal Campus, Pakistan
M. Kabir Hassan
College of Business Administration, University of New Orleans, New Orleans,
Louisiana, USA, and
Khurram Abbas and Qamar Uz Zaman
Department of Management Sciences, COMSATS University Islamabad,
Sahiwal Campus, Pakistan
Abstract
Purpose –This paper aims to examinethe impact of general elections on the stock returns of the politically
connectedgroup affiliated firms of Pakistan.
Design/methodology/approach –This study uses the market model to assess the impact of political
connections (PCs) on abnormalstock returns, before and after election events. We have used share price data
of non-financialfirms of Pakistan for the years 2008-2013.
Findings –It has been found that behaviorof cumulative average abnormal returns (CAAR) is significantly
different for standalone and politically connected group affiliated firms. The results reveal that CAARs of
politically connectedgroup affiliated firms have experienced less deviationas compared to stand alone firms.
Therefore,it is argued that politically connected group firms may reduce the impact of political uncertaintyon
stock returnsin comparison to stand alone firms.
Practical implications –This study is helpful for policy regulators of Pakistan to devise appropriate
policiesto maintain a level playing field for politically connected and standalonefirms.
Originality/value –This study provides a new dimensionto understand the role and association of PCs
and generalelections with stock markets returns.
Keywords Political connections, Stock returns, Group affiliation, General elections
Paper type Research paper
1. Introduction
Political connections (PCs) are a multiform phenomenon, often classified as direct and indirect.
The direct PC means personal relation of politicians with the firms, e.g. a politician is member
of board of directors or holds large ownership stake in a firm (Brown and Huang, 2017;Faccio
and Zingales, 2017;Faccio et al.,2006;Fisman, 2001;Khwaja and Mian, 2005). The other type of
PC considers internal financial relation of politicians and firms, e.g. election campaign
financing (Claessens et al.,2008;Cooper et al., 2010;Correia, 2014;Mehta et al., 2017;Roberts,
JEL classification –D72, P16, P26, C32, P43
JFC
27,1
258
Journalof Financial Crime
Vol.27 No. 1, 2020
pp. 258-273
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-02-2019-0022
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1359-0790.htm
1990). These political links are common in business family or group through social networking
and lobbying (Blau et al., 2013;Bliss and Gul, 2012;Lambert, 2018).
Business groups and political parties mire in to gain benefits from each other. Business
groups tend to gain desired subsidies and internal information (Wu et al.,2012), greater
access to cheap credit lines, governmentloans (Claessens et al.,2008;Houston et al., 2014), to
exploit greater market share, and to avoid corporate social responsibility (Faccio, 2010;
Khwaja and Mian, 2005;Muttakin et al., 2018). Political parties tend to seek rent of their
affiliations from business firms (Shleifer and Vishny, 1994;Stigler, 1971). The rent seeking
activity creates a financial burden on the politically connected firms (Bertrand et al.,2007;
Bertrand et al., 2018;Faccio,2010;Saeed et al.,2016).
It is learned that corporate performance is highly correlated with the political
environment of a country.Political events have a substantial effect on firm performanceand
stock market returns. These events may include termination of a political party, new
legislation, sudden death of politician and elections. Such events may strengthen PC and
may affect the stock market returns as well or vice versa (Claessens et al., 2008;Coulomb
and Sangnier, 2014;Faccio and Parsley,2009;Fan et al., 2007;Fisman, 2001;Goldman et al.,
2013;Liu et al., 2017;Roberts,1990).
Political events bring uncertainty to the business environment. PCs may be helpful to shield
the firms against the negative effects of uncertain and indecisive political events. According to
Mitchell and Joseph (2010), PC is a valuable asset of firms, used to reduce the external market
risk. The firmsmayusetheirPCstoneutralizetheeffect of political uncertainty. According to
the resource dependency theory (RDT), firms use PCs to reduce the effect of uncertainty
associated with political events, particularly elections (Pfeffer and Salancik, 1978).
According to Brown et al. (1988) sudden and unanticipated political events also increase
uncertainty regarding stock market performance. The PCs may also serve as a positive signal
to the investors. It is evident that political uncertainty has a direct impact on stock returns of a
firm (Gemmill, 1992;Li and Born, 2006;Oehler et al.,2013;Pantzalis et al., 2000). Business
groups or affiliated firms are in a stronger position to create and exploit such PCs. Therefore,
we argue that politically connected groups firms maintain an advantageous position by having
easy or early access to internal political information, in contrast, to stand alone firms.
We have attempted to study the effect of generalelections on stock market performance
of politically connected business groups. We have used data of Pakistani listed firms to
judge the effect of PC on cumulative average abnormal returns (CAAR) of business group
firms. The market model (MM) approach has been used for the purpose. There is a lack of
evidence regarding stock returns of politically connected business groups with effect to
elections. This study extends the debate of stock market response to the stock prices and
returns of politically connected group firms and standalone firms, before and after the
general elections. We find that return patternsof politically connected firms experience less
deviation from the mean value as compare to stand alone firms. It indicates that PCs are
helping to mitigate the negativeeffect of political events for the firms.
Rest of paper is organized, as second section is based on literature and hypothesis to
highlight some questions, the third section contains the selection of sample and analysis
techniques, fourth section is about results and discussion, and fifth section concludes the
findings.
2. Literature
2.1 Group affiliated firms and political connections
Business groups, defined as a set of firms, which are legally independent, bound by formal
and informal ties and accustomed to unified actions (Khanna and Rivkin, 2001).
Political
connections
during general
elections
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