Undercover Economist: The profits of political connections

In the early hours of November 8 2000, the vice-president of the United States, Al Gore, was travelling to Nashville to make his concession speech. But then the messages began to arrive on Gore’s pager, suggesting that perhaps he wasn’t behind. Having already conceded, informally and in private, Gore called Bush again to tell him that he’d changed his mind.

November 8 was not the only pivotal date. On December 8, the Florida Supreme Court ordered a recount in certain counties, raising the chance that Gore would win. On December 13, after the federal Supreme Court halted the recount, Gore conceded to Bush.

Because these sudden decisions were hard to anticipate, they provide an excellent test of the value of political connections to listed companies. If politics means profit, a “Republican” company should have taken a knock on December 8, but surged on December 13, when Bush’s victory was confirmed.

A recent study by financial economists Eitan Goldman, Jongil So and Jorg Rocholl found exactly that: Republican companies beat the market by 3 per cent over the week after Bush’s victory was assured; Democratic companies took almost a 3 per cent knock. Goldman, So and Rocholl defined “Republican” companies as those with board members who had served as Republican senators or congressmen or members of a Republican administration, and with no Democratically connected board members.

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Tim Harford’s blog

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Tim, also known as the Undercover Economist, writes about the economics of everyday life.