Political connection and its impact on equity market

Mingsheng Li, Desheng Liu, Hongfeng Peng and Luxiu Zhang

Research in International Business and Finance, 2022, vol. 60, issue C

Abstract: We investigate a less explored issue of how political connections affect equity price informativeness after controlling for state ownership. Politically connected (PC) companies have information advantages due to their access to politicians. However, PC companies also have incentives to obfuscate information and limit information disclosure, which adversely affects stock price informativeness. We find that PC companies have significantly higher price synchronicity (SYN), meaning less informative stock prices than non-PC companies. State ownership also negatively affects price informativeness, but it does not substitute the negative effect of political connections. Institutional environment development plays a mediating role and reduces the negative effect of political connections on price informativeness. We employ various robustness tests to confirm the observed negative relation between political connections and equity price informativeness. For example, an anti-corruption campaign (an exogenous event) reduces SYN for all companies and makes the difference in SYN between PC and non-PC companies statistically insignificant. PC companies are less likely to be publicly exposed for fraudulent activity than non-PC companies are, suggesting that political connections possibly shield PC companies from public scrutiny, which also makes stock prices of PC companies less informative.

Keywords: Political connections; Price informativeness; State ownership; Chinese markets (search for similar items in EconPapers)
JEL-codes: G14 G39 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:60:y:2022:i:c:s0275531921002142

DOI: 10.1016/j.ribaf.2021.101593

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