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Corporate political ties impact share prices: study
2008-05-26
Companies with a board member who has ties to a winning political party enjoy a significant bounce in their share price following an election, according to a study released on Monday. Share prices also rise after an appointment to the board of a politically connected person, according to the study by the Berlin-based European School of Management and Technology. Seven days after the U.S. presidential election in 2000 companies in the benchmark Standard & Poor's 500 Index (.SPX) with board connections to the winning Republican party posted a nearly 3 percent increase in share price, the study said. Democrat-affiliated businesses found their share prices were hit hard by the Republican victory, experiencing almost a 3 percent decline when weighted by market capitalization. A company was defined as Republican or Democrat if it had at least one board member formerly affiliated to a particular party and no such member with ties to the other side. A comprehensive analysis of the S&P 500 showed the boost in share prices is true whether a company is given an equal weighting, or weighted based on market capitalization. Based on the school's findings, the study said a Democratic victory this November could favor Apple Inc (AAPL.O), International Business Machines Corp (IBM.N) and Starbucks Corp (SBUX.O), while a Republican win could benefit AT&T (T.N), ConocoPhillips (COP.N) and Lockheed Martin Corp (LMT.N). The study brings home the connection between politics and financial markets, and helps account for some of the value that is perceived in major Western political appointments, said Jorg Rocholl, an associate professor at the school and co-author of the report. The opportunities companies may enjoy from a political connection include opening doors for government contracts, courting business overseas and lobbying for tax incentives or tariffs on rival companies, Rocholl said. The study provides insight into how a company's stock may exhibit abnormal returns after elections. For investors engaged in short-selling or price-arbitrage strategies, this poses a significant market opportunity, he said. "Whilst there have always been anecdotal reports about the effect political connections have for companies, this is the first time a relationship of this sort has been categorically proved," Rocholl said in a statement. Eitan Goldman of Indiana University and Jongil So of the University of North Carolina also co-authored the study. 2000 ELECTION STRONG TEST CASE The 2000 presidential election provided a strong test case because the tight race did not allow the market to anticipate a result, the study said. The outcome of voting on November 7 was not decided until a Supreme Court decision in December. The level of political uncertainty is reflected in share price movements around two significant dates: on December 8 when a Florida court ordered a ballot recount, favoring a Democrat victory, and the final decision the night of December 12. On December 8, Democrat companies enjoyed a positive stock return of 1.45 percent and Republican portfolio saw a negative return of 1.26 percent, the study found. However, the return for a Republican portfolio on December 13 amounted to 0.32 percent while the negative return for the Democratic portfolio was 1.63 percent. (Editing by Leslie Adler)
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