Political Connections and Firm Performance, An Analysis of Listed Firms in Sri Lanka

Abstract

This thesis investigates whether political connections affect the value of listed firms in Sri Lanka during positive and negative events for the Sri Lankan government. Using a portfolio time series event study methodology, this thesis compares politically connected firms with non-connected firms using four different types of portfolio hedges. It uses a political connectedness definition to identify firms with political connections within a sample of 103 firms from 2006 to 2011. This thesis aims to answer two questions using the above methodology. Firstly, the event study uses five events to identify if there is a significant difference in cumulative abnormal returns between politically connected and non-connected firms during positive and negative events for the Sri Lankan government. Secondly, this thesis examines if there are significant differences in cumulative abnormal returns between stronger politically connected firms when compared to weaker politically connected firms during positive and negative events for the government. There are several robustness tests carried out to add strength to the findings of this thesis. The hypotheses are further investigated using alternative political connectedness measures such as projects granted to firms by the government, political appointments made by the government after the civil war ended and an analysis of the Tobin‟s Q value of politically connected and non-connected firms. The overall results for the hypotheses indicate only one event with significant cumulative abnormal returns across all event windows consistently. The results indicate a weak difference between politically connected and non-connected firms. Therefore, the results of this thesis suggest that despite the numerous news articles and public perception detailing the benefits received by politically connected firms, the performance of the politically connected firms does not significantly differ from non-connected firms in Sri Lanka.