Political connections and firm value: an analysis of listed firms in Sri Lanka

The following study examines the impact of political connections on firm value in a Sri Lankan setting. Since the Presidential elections in 2005 until 2011, the end of our sample period, Sri Lanka had a government dominated by the Rajapaksa family. Based on public perception in Sri Lanka and existing literature, we conjecture that connections to this family provide firms with a significant advantage during the growth period that followed the end of the civil war in Sri Lanka in 2009.
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By Henk Berkman, Department of Accounting and Finance, University of Auckland, Auckland, New Zealand, and Vidura Galpoththage PWC, Auckland, New Zealand

Abstract

Purpose – The purpose of this study is to use a portfolio-time- series approach to examine the impact of five important political events on the value of politically connected firms in Sri Lanka.

Design/methodology/approach – This study examines five major political events to test if political connections affect market value of listed companies in Sri Lanka. Results show that despite numerous news articles and public perception suggesting otherwise, there is no convincing evidence which indicate that political connections increase firm value in Sri Lanka.

Findings – The empirical results provide no evidence that political connections increase firm value in Sri Lanka. Further tests indicate that the government is not biased towards politically connected firms when granting major projects. The authors also fail to find a relation between Tobin’s Q and the level of political connection after including several common control variables.

Originality/value – This study contributes to the literature on the value of political connections by using a robust event study methodology anda novel setting: Sri Lanka in the period around the end of the civil war. Keywords Sri Lanka, Corporate governance, Political connections

Introduction

This study examines the impact of political connections on firm value in a Sri Lankan setting. Since the Presidential elections in 2005 until 2011, the end of our sample period, Sri Lanka had a government dominated by the Rajapaksa family. Based on public perception in Sri Lanka and existing literature, we conjecture that connections to this family provide firms with a significant advantage during the growth period that followed the end of the civil war in Sri Lanka in 2009.

Read the full study at the link below

PAR-06-2014-0020 (1)