Cross-country differences in the effect of political connections on stock price informativeness |
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| Institution: | 1. School of Accountancy, Singapore Management University, Singapore;2. Department of Accounting, College of Business, The University of Texas at Arlington, Arlington, TX, USA;1. Accounting Department, Auckland University of Technology, New Zealand;2. Accounting Discipline Group, University of Technology Sydney, Australia;1. Department of Finance, Tunghai University, Taiwan;2. Department of Quantitative Finance, National Tsing Hua University, Center for Research in Econometric Theory and Applications, National Taiwan University, Taiwan;1. School of Business Administration, Dongbei University of Finance and Economics, Dalian, China;2. W. P. Carey School of Business, Arizona State University, USA;1. International Business School Suzhou, Xi’an Jiaotong-Liverpool University, Suzhou, Jiangsu Province 215123, China;2. W. P. Carey School of Business, Arizona State University, Tempe, AZ 85287, USA;3. Department of Accounting, Monash Business School, Monash University, Caulfield East, Victoria 3145, Australia;4. Department of Accounting, Deakin Business School, Deakin University, Burwood Highway, Burwood, Victoria 3125, Australia |
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| Abstract: | Using an international sample of firms from 28 countries, we document that there exists a negative relationship between political connections and the informativeness of stock price, as measured by idiosyncratic volatility (IV). This finding is robust to alternative regression specifications, sub-samples analyses, and concerns related to endogeneity. A more detailed analysis shows that out of the different types of possible connections, the connectedness of the owners is the primary driver of this result. Further, the negative association is only significant for firms in countries characterized by low institutional quality (corrupted countries, countries with low access to external equity markets, and countries with low media penetration). There is no evidence of any relation between political connections and stock price informativeness for firms in countries characterized by high institutional quality. Overall, our results show that although political connections exacerbate rent-seeking that weaken the firms’ information environment on average, the negative information consequences are compensated by the countries’ institutional quality. |
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| Keywords: | Political connections Idiosyncratic volatility Institutional infrastructure |
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