Political Connection and Firm Value – Theory and Indian Evidence

Political connection of firms is an important issue not just for corporate governance of an individual firm but from macro economic standpoint for the governance of the society as a whole. In India information on political connectedness of a firm is heuristic in nature and proxied by newspapers or the other media reports. Against the backdrop of a theoretical perspective as regards the economics and valuation of political connectedness, the paper uses the context of a political event – namely U.P. Assembly Election 2012 and works out an empirical study. The empirical result, consistent with our theoretical perspective, highlight that the political connectedness does exist in India impacting valuation in a statistically significant manner and causing volatility in valuation of politically connected firms more than that could be explained by market movement during a political event. The federal set up of government makes this issue of political connectedness more complicated. Existence of such relationship for a country, high on global corruption index points towards possibility of rent seeking and emergence of crony capitalism