High-level corporate political connections and firm's value

: evidence from Portugal

Abstract

The aim of this study is to test whether in the Portuguese framework the appointment of former politicians to a top management or board firm position is linked to a change in firm’s value. If firm’s performance is affected, it will be capitalized into equity prices, and we may expect it to be due to the investor’s anticipation of future political benefits, such as: easier access to debt financing; lower taxes; power to influence the laws under which the firm operates; possibility of winning government contracts, and stronger market power. This Business-Government interface has never been studied in the context of the Portuguese economy. Thus, to address this issue, this study uses an original hand-collected data set based on 46 firms that exchange in the Euronext Lisbon, and based on the composition of the Portuguese Constitutional Governments from January, 1980 to April, 2012. The results suggest that, in average, the appointment of a politically connected executive leads to a negative impact on firm’s value which is noticeable by the significant and negative abnormal stock returns. The results further suggest that, regardless of the political party to which an executive is linked, his appointment is also recognized by investors as a damaging strategy for the business. The only exceptions are the appointments where the number of former politicians linked to each party is balanced. Moreover, the results reveal that investors tend to alleviate the negative impact of a political appointment when they know which position those executives will occupy as well as the level in the corporate governance hierarchy to which each position corresponds. However, we should stress that these conclusions are limited by the small sample of political appointments – only 23% of our appointments are related with the nomination of politically connected executives. Moreover, our lack of capacity to control for potential leakage of information prior to the day of the appointment can be undermining more accurate results.

Date of Award	Jun 2012
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Ricardo Reis (Supervisor) & Joaquim Miranda Sarmento (Supervisor)