Center for the Study of Democracy

Using a new dataset of Italian publicly traded companies between 1994 and 2008, this paper aims to quantify the value of different types of political connections. Conducting an event study on stock returns, we examine how the stocks of connected companies perform before and after the politicians to whom they are connected are either elected to Parliament, or appointed as government ministers. First, we check whether political connections in general lead to abnormally positive returns. Then, we ask whether political connections have a different effect on stock returns, depending on whether companies have politicians themselves (direct connection) or some of their relatives (indirect connection) among their administrators. Finally, we test the hypothesis that connections are effective only when the politicians are members of the governing coalition. Contrary to most studies, political connections are not always associated with positive stock returns. Taking stock performance as a proxy for the benefits of connections, we conclude that only certain political connections are in fact valuable to companies. Being connected with the (future) governing coalition has the predicted positive effect, whereas gaining or maintaining a connection with the opposition coalition has no effect, or even a negative effect. Also, only indirect connections are found to increase the company’s value, while direct connections are not. However, given the size and composition of our sample, we cannot confidently conclude that indirect connections do differ from direct ones.