Empirical Study On The Relationship Between Political Connections And Stock Volatility

The Political connection is a universal phenomena in the process of world economic development, many countries exist different degrees of political association in the world, which is also the focus of research in recent years.Political connection is caused by government’s intervention in our economy, but at the same time, they may have two diametrically opposite economic effects on economic entity. In china, the government play the leading role in the social resources allocation, especially in Chinese special political and economical background, they would develop diversified associations with government through various ways, and they hope obtain easier access to debt financing, stronger market power and lower taxation and ultimately affect firm valuation. Based on the overview of research on political connections at home and abroad, and rooted in china’s unique institutions background, this paper explores the relationship between Chinese listed firm’s stock price volatility and political connection, and focuses on examining the influence of political connection on stock price volatility under different enterprise property and the influence of different political connection types on stock price volatility.This paper analyze the listed firms’ present situation of political connection by using a sample of Chinese A-share listed firms during 2004-2012, Further,this paper set up multiple regression model to study in depth the effects of political connections on stock price volatility.The result show political connection firms have higher volatility than non-political connections firms; In further study, we find that if the listed firm has different properties, the influence of political connections on the stock price volatility is significantly different, and the private enterprise has more obvious impact. The stock fluctuation has representatives background rate is higher than that of politically connected company stock with government officials background politically connected company rate; in addition to consider the differences of institutional environment in different regions, in the institutional environment of poor areas, effects of stronger political association on stock volatility.This paper extends scholars’ theoretical study of political connections, and also provides valuable empirical evidences for the current research on the relation between political connections and stock price volatility. On the whole, the political connection can improve the listed firms’ stock price volatility, however the improvement of institutional environment can reduce this effect. This study also has important theoretical and practical significance for understanding the political connection path and the economic consequences, the research aims at throwing light on China’s policies, and discloses that China should further improve political and legal institution building, reduce motivation of government intervention and enterprise connection-seeking, and finally realize social fairness and healthy development of economy.