When political connections actually harm firm value: lessons from a case study

Why study this

Corporate ties to governments and politicians, often called political connections, are widespread throughout the world, and while the academic literature has provided ample evidence of a positive relationship between political connections and firm value, the authors argue those previous estimations could be potentially biased. If firms actively seek to establish those connections that create value and avoid those that can destroy it, then the observed connections likely overrepresent the positive cases, while underrepresenting the negative ones. This introduces a sample selection problem, which can bias estimations. To address this concern and obtain unbiased estimates of the effect of political connections on firm value, the authors exploit a natural experiment that delivers quasi-random assignment of new political connections to firms. This experiment is the 2008 nationalization of the Argentine pension system, which transferred to the government the equity shares of dozens of publicly-traded firms, allowing it in some cases to also appoint board directors.