Do political connections affect the market reaction to firms’ inclusion in or exclusion from the Sharia index?

Budi Wahyono ()
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Budi Wahyono: Yamaguchi University

Eurasian Business Review, 2023, vol. 13, issue 4, No 4, 835-854

Abstract: Abstract Previous studies have clearly documented the shareholder advantages and disadvantages of political connections. However, evidence of the role of political connections in ethical investment is scarce. This study investigates the relationship between political connections and the reconstructions of the Sharia index in Indonesia. Using the event study methodology, I evaluate the abnormal returns surrounding the announcement of the inclusion or exclusion of firms in or from the Indonesia Sharia Stock Index (ISSI). I further conducted a regression analysis to enhance the identification of the relationship between political connections and Sharia compliance. Neither the inclusion nor exclusion of firms in or from the ISSI yields abnormal returns, indicating that investors are not very concerned about ISSI reconstitutions. Political connections increase firm value before their inclusion in the ISSI. However, the benefits of such connections are lost after their inclusion in the ISSI. Meanwhile, I find no evidence of a relationship between political connections and the market reaction surrounding the exclusion of firms from the ISSI.

Keywords: Political connections; Sharia compliance; Sharia stock index; Indonesia; G14; G23; G32; D72; P51; Z12 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s40821-023-00249-0

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