Political "Connections"

According to a new study by the Berlin-based European School of Management and Technology, companies with a board member who has ties to a winning political party enjoy a significant bounce in their share price following an election.

Moreover, share prices also rise after an appointment to the board of a politically connected person.   The study’s authors claim that seven days after the U.S. presidential election in 2000 companies in the Standard & Poor’s 500 Index with board connections to the Republican party posted a nearly 3% increase in share price.   Democrat-affiliated businesses, on the other hand, suffered a nearly 3% loss, when weighted by market capitalization.   However, an analysis of the S&P 500 showed the boost in share prices is true whether a company is given an equal weighting, or weighted based on market capitalization.

A company was defined as Republican or Democrat if it had at least one board member formerly affiliated to a particular party and no such member with ties to the other side.

The 2000 Election

The 2000 presidential election provided a strong test case because the tight race did not allow the market to anticipate a result.   In fact, the outcome of the November 7 vote was not finalized until a Supreme Court about a month later.   The study claims that uncertainty is reflected in share price movements around two significant dates: December 8 when a Florida court ordered a ballot recount (ostensibly favoring a Democrat victory) – when Democratically-tied firms enjoyed a 1.45% gain, while the Republican “portfolio” lost 1.26%.   On December 13 (the day after the U.S. Supreme Court weighed in – stopping the recount – that Democratic portfolio dropped 1.63%, while the GOP-oriented one eked out a 0.32% increase.

Based on the school’s findings, the study said a Democratic victory this November could favor  Apple Inc, International Business Machines Corp, and Starbucks Corp – while a Republican win could benefit  AT&T and Lockheed Martin (see next page).

“Whilst there have always been anecdotal reports about the effect political connections have for companies, this is the first time a relationship of this sort has been categorically proved,” Jorg Rocholl, an associate professor at the school and co-author of the report, said.   Eitan Goldman of Indiana University and Jongil So of the University of North Carolina also co-authored the study.

In spite of the consequences in post-election periods, the study separately concluded that it is not all bad news for those companies connected to the losing party.   In fact, in normal conditions, having a board member with political connections to any party is in itself a good thing, regardless of which party is in power, according to the study’s authors.   Looking at the political connections of board members in S&P 500 companies between 1981 and 2005, the research found that companies “…consistently experience a more positive return when politically connected individuals are nominated to the board, irrespective of whether they have relevant expertise in that field.”

align="left">SOURCE: ESMT

align="left"> (Please note, this table is forward-looking and only applies the logic of the study to the S&P 500 as it currently stands. The above table does not directly emanate from the original research.)

align="left">SOURCE: ESMT

align="left"> (Please note, this table is forward-looking and only applies the logic of the study to the S&P 500 as it currently stands. The above table does not directly emanate from the original research.)