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
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).