Political Connection, Corruption, and Demand-Driven Stock Returns

Chunxiao Lu ()
Additional contact information
Chunxiao Lu: University of Canterbury, https://www.canterbury.ac.nz

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: I examine how firm-level political connections impact stock returns through institutional demand. I find that demand shifts by mutual funds significantly contribute to the decline in concurrent stock returns: mutual funds generally reduce holdings of stocks with higher political connections, especially those headquartered in provinces with elevated corruption indices, following the 2012 Chinese anti-corruption campaign announcement. Overall, while political connections have an insignificant direct effect on stock returns as an additional pricing factor, they significantly and negatively impact stock returns through the fund demand channel. Under a characteristic-based demand asset pricing framework, I further investigate the aggregate price impact for stocks with different political connections. I show that stocks with stronger political connections experience greater price impacts, particularly among the least liquid stocks and around the announcement of the 2012 anti-corruption campaign. This demand-based approach offers a novel perspective to understand the decrease in stock returns, isolates the effects of political connections from those of corruption, and emphasizes the demand-side effects on increased volatility during periods marked by unexpected political events.

Keywords: Demand shifts; political connection; corruption; stock returns; mutual fund; institutional investor; demand elasticity (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 G18 (search for similar items in EconPapers)
Pages: 80 pages
Date: 2025-09-01
References: Add references at CitEc
Citations:

Downloads: (external link)
https://repec.canterbury.ac.nz/cbt/econwp/2515.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:25/15

Access Statistics for this paper

More papers in Working Papers in Economics from University of Canterbury, Department of Economics and Finance Private Bag 4800, Christchurch, New Zealand. Contact information at EDIRC.
Bibliographic data for series maintained by Albert Yee ().