Do firms harvest from political connections during general elections? Case of Pakistan

Author:Ayesha Ashraf, M. Kabir Hassan, Khurram Abbas, Qamar Uz Zaman
Position:Department of Management Sciences, COMSATS University Islamabad, Sahiwal Campus, Pakistan
Pages:258-273
SUMMARY

Purpose This paper aims to examine the impact of general elections on the stock returns of the politically connected group affiliated firms of Pakistan. Design/methodology/approach This study uses the market model to assess the impact of political connections (PCs) on abnormal stock returns, before and after election events. We have used share price data of non-financial firms of... (see full summary)

 
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Do rms 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 afliated rms 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-nancialrms of Pakistan for the years 2008-2013.
Findings It has been found that behaviorof cumulative average abnormal returns (CAAR) is signicantly
different for standalone and politically connected group afliated rms. The results reveal that CAARs of
politically connectedgroup afliated rms have experienced less deviationas compared to stand alone rms.
Therefore,it is argued that politically connected group rms may reduce the impact of political uncertaintyon
stock returnsin comparison to stand alone rms.
Practical implications This study is helpful for policy regulators of Pakistan to devise appropriate
policiesto maintain a level playing eld for politically connected and standalonerms.
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 afliation, General elections
Paper type Research paper
1. Introduction
Political connections (PCs) are a multiform phenomenon, often classied as direct and indirect.
The direct PC means personal relation of politicians with the rms, e.g. a politician is member
of board of directors or holds large ownership stake in a rm (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 nancial relation of politicians and rms, e.g. election campaign
nancing (Claessens et al.,2008;Cooper et al., 2010;Correia, 2014;Mehta et al., 2017;Roberts,
JEL classication 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 benets 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
afliations from business rms (Shleifer and Vishny, 1994;Stigler, 1971). The rent seeking
activity creates a nancial burden on the politically connected rms (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 rm 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 rms against the negative effects of uncertain and indecisive political events. According to
Mitchell and Joseph (2010), PC is a valuable asset of rms, used to reduce the external market
risk. The rmsmayusetheirPCstoneutralizetheeffect of political uncertainty. According to
the resource dependency theory (RDT), rms 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
rm (Gemmill, 1992;Li and Born, 2006;Oehler et al.,2013;Pantzalis et al., 2000). Business
groups or afliated rms are in a stronger position to create and exploit such PCs. Therefore,
we argue that politically connected groups rms maintain an advantageous position by having
easy or early access to internal political information, in contrast, to stand alone rms.
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 rms to
judge the effect of PC on cumulative average abnormal returns (CAAR) of business group
rms. 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 rms and standalone rms, before and after the
general elections. We nd that return patternsof politically connected rms experience less
deviation from the mean value as compare to stand alone rms. It indicates that PCs are
helping to mitigate the negativeeffect of political events for the rms.
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 fth section concludes the
ndings.
2. Literature
2.1 Group aliated rms and political connections
Business groups, dened as a set of rms, which are legally independent, bound by formal
and informal ties and accustomed to unied actions (Khanna and Rivkin, 2001).
Political
connections
during general
elections
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