| One of the interesting topics in finance is the relationship between politics and firm value. In particular, many people have analyzed whether or not political connections add value to the firm. While previous studies addressed this question in the contexts of countries with weak legal systems, I attempt to study whether political connections are also important in non corrupted countries with a well functioning strong legal system.;This thesis consists of two empirical studies on political connections and firm value. Chapter I analyzes whether politically connected boards affect firm value and then Chapter II explores the specifics of what are the benefits from political connections.;More specifically, Chapter I explores whether political connections are also important in the United States. It uses an original hand-collected data set on the political connections of board members of S&P500 companies to sort companies into those connected to the Republican Party and those connected to the Democratic Party. The analysis shows a positive abnormal stock return following the announcement of the nomination of a politically connected individual to the board. The paper also analyzes the stock price response to the 2000 Presidential Election and finds that companies connected to the Republican Party increase in value while companies connected to the Democratic Party decrease in value.;Chapter II analyzes whether political connections of public corporations in the United States affect the allocation of government procurement contracts. Using this classification, the study focuses on the change in control of both House and Senate following the 1994 midterm election and on the change in the Presidency following the 2000 election. An analysis of the change in the value of the procurement contracts awarded to these companies before and after 1994 and 2000, respectively, indicates that companies that are connected to the winning (losing) party are significantly more likely to experience an increase (decrease) in procurement contracts. In total, these findings suggest that the allocation of procurement contracts is influenced, at least in part, by political connections. Thus, this study provides one of the first pieces of evidence showing a direct avenue through which political connections add value to U.S. companies. |
