Vanderbilt Study Quantifies Value of Political Connections

New research from Vanderbilt puts a dollar-value on political connections. David Parsley and Mara Faccio co-authored a study, looking at sudden deaths of politicians from 1973 to 2004 and the subsequent drop in stock market prices for companies in their hometowns. Parsley, a professor of economics and finance, says the drops are representative of the value of these political ties. He says the study proves that political connections are more beneficial and more pervasive than suspected.

“It just says that politicians do favor companies. There’s a close linkage between the business world and the political world.”

Parsley and Faccio collected data on deaths of politicians worldwide. They based their study on sudden death specifically because it cannot be anticipated and has a more apparent affect on the stock market. The average drop in share prices per death in the United States is 4%.

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The study, called “Sudden Death: Taking Stock of Geographic Ties,” came out of previous studies conducted by Mara Faccio, looking at the establishment of political ties and their impact on companies. She began by tracking stock market prices as a person either left a company for a government position or vice versa. Parsley says the switch to the sudden death scenario developed because it leaves less room for error.

“In the review process it was pointed out, I guess, more than once that, well, that method is kind of missing some of the value because there’s all sorts of possibilities for leakage of the information.”

The average post-death drop in stock market price world-wide is 1.7%, much smaller than that of the United States, suggesting more corruption, but Parsley says that is not necessarily the case. Because the study only takes into account publicly traded companies, he says greater losses in the US may point to greater transparency that comes with widespread ownership of companies. In other countries, privately owned companies may have experienced more drastic losses, but this data would not have been shown in the study.