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Political connection, government policy, and investor trading: Evidence from an emerging market

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  • Lin, Chih-Yung
  • Ho, Po-Hsin
  • Shen, Chung-Hua
  • Wang, Yu-Chun

Abstract

This study investigates whether political connection (PC), government policy (GP), or both affect stock returns before and after the Taiwanese 2008 presidential election. We also examine whether the two effects influence the five types of investor trading during the election. Past studies have separately focused on either the PC or the GP effect, whereas this study considers both effects. Specifically, we consider five types of investors, namely, foreign investors, security investment trust companies (INVTRUSTs), security dealers, board of directors and supervisors, and individual investors. We find that firms connecting only with the winning party exhibit positive abnormal returns, and only INVTRUSTs increase the shareholdings of these firms (PC effect). Our results do not support the GP effect alone. Instead, we identify that firms with joint PC and GP effects have the abnormal returns during election periods.

Suggested Citation

  • Lin, Chih-Yung & Ho, Po-Hsin & Shen, Chung-Hua & Wang, Yu-Chun, 2016. "Political connection, government policy, and investor trading: Evidence from an emerging market," International Review of Economics & Finance, Elsevier, vol. 42(C), pages 153-166.
    • Handle: RePEc:eee:reveco:v:42:y:2016:i:c:p:153-166
    DOI: 10.1016/j.iref.2015.09.008
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    3. Shen, Chung-Hua & Bui, Dien Giau & Lin, Chih-Yung, 2017. "Do political factors affect stock returns during presidential elections?," Journal of International Money and Finance, Elsevier, vol. 77(C), pages 180-198.
    4. Imlak Shaikh, 2019. "The U.S. Presidential Election 2012/2016 and Investors’ Sentiment: The Case of CBOE Market Volatility Index," SAGE Open, , vol. 9(3), pages 21582440198, July.
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    6. Deng, Yuping & Wu, Yanrui & Xu, Helian, 2019. "Political connections and firm pollution behaviour: An empirical study," BOFIT Discussion Papers 4/2019, Bank of Finland Institute for Emerging Economies (BOFIT).
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    8. Lee, Chien-Chiang & Zeng, Mingli & Luo, Kang, 2024. "The impact of urbanization on food security in China," International Review of Economics & Finance, Elsevier, vol. 93(PB), pages 1159-1175.
    9. Shaikh, Imlak, 2017. "The 2016 U.S. presidential election and the Stock, FX and VIX markets," The North American Journal of Economics and Finance, Elsevier, vol. 42(C), pages 546-563.
    10. Faraji, Omid & Kashanipour, Mohammad & MohammadRezaei, Fakhroddin & Ahmed, Kamran & Vatanparast, Nader, 2020. "Political connections, political cycles and stock returns: Evidence from Iran," Emerging Markets Review, Elsevier, vol. 45(C).
    11. K. Batu Tunaya & Serhat Yüksel, 2017. "The relationship between corporate governance andforeign ownership of the banks in developing countries," Contaduría y Administración, Accounting and Management, vol. 62(5), pages 25-26, Diciembre.
    12. Yuping Deng & Yanrui Wu & Helian Xu, 2020. "Political Connections and Firm Pollution Behaviour: An Empirical Study," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 75(4), pages 867-898, April.
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    14. Yi, Shangkun & Wang, Jian & Wang, Xiaoting & Feng, Hongrui, 2022. "CEO political connection and stock sentiment beta: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).

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    More about this item

    Keywords

    Political connection; Government policy; Stock returns; Investor trading; Presidential election;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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