Abstract:
This paper estimates the value of a common form of political connections for firms from a policy shock in China. In October 2013, the central government announced a new policy prohibiting former government officials from working in firms. Firms previously having former government officials as independent directors were affected. There are two main findings in this paper. First, the affected firms had on average a -10 pp buy-and-hold-abnormal-return (BHAR) in 6 to 12 months following the policy shock, which can be attributed to a loss of political connections. Due to the favorable features of the policy shock, this political connection value estimation has a cleaner interpretation and has greater potential to be generalized. Second, the policy effects exhibit considerable heterogeneity, which suggests firms count on political connections to different degrees. There is some suggestive evidence connecting the value of political connection for a firm to its certain characteristics.