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Political connection and stock returns: Evidence from party alternation in Taiwan

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  • Lee, Jen-Sin
  • Yen, Pi-Hsia
  • Lee, Liang-Chien

Abstract

This study investigates the impact of political connections in terms of party alternation on stock returns in Taiwan. It considers two major political parties namely: Kuomintang (KMT) and Democratic Progressive Party (DPP) which compete for presidency every four years and acquired the power during the 2008 and 2016 election, alternately. Taiwan's stock market is export-oriented and considered as one of the major trade partner of China. KMT strongly advocates the importance of the Chinese market while DPP views it in opposite position. This study conjectures that different perspectives of these political parties will affect the existing trade treaties and reflect on the stock market performance. We compare the export rate effect to firms during the leadership of KMT and DPP. Our study reveals that export rate is positively related on stock returns when KMT won the president election. The effect is stronger to firms with high export rate and connected to KMT than firms with low export rate and connected to DPP. This study shows a negative effect on stock returns when DPP won the president election. This result is contrast to the previous study on the impact of PC on stock returns.

Suggested Citation

  • Lee, Jen-Sin & Yen, Pi-Hsia & Lee, Liang-Chien, 2019. "Political connection and stock returns: Evidence from party alternation in Taiwan," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 128-137.
    • Handle: RePEc:eee:reveco:v:63:y:2019:i:c:p:128-137
    DOI: 10.1016/j.iref.2018.08.015
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    More about this item

    Keywords

    Political connection; Stock returns; Party alternation; Export rate effect; Reverse export rate effect;
    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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