Do Election Results Affect the Value of Politically Connected Firms? - The Effect of the Schroeder-Merkel Change of Government on German Prime Standard Firms

This study applies event study methodology to the outcomes of the 2005 election of the German Bundestag. Results are compared to those of Goldman, Rocholl and So (2009) who found that following the 2000 presidential election in the US, value effects were positive for firms connected to the Republicans and significantly different from the negative ones of firms connected to the Democrats. The present study shows that, contrary to expectations, political connections had little impact on the value of politically connected corporations among the companies listed at the DAX, MDAX, SDAX or TecDAX. The key results of this study are: First, there is a significantly smaller fraction of politically connected firms in Germany than in the US. Second, following the start of the exploratory talk and the inauguration of the new government, politically connected companies generate about 0.7 and 1.2 percent higher abnormal returns, respectively. Finally, while there is no significant impact of the election results on the returns of companies with political connections with respect to other different characteristics, there is slight support that connections to the federal parliament are more valuable than those to the state parliaments. The different reactions of the US and the German Stock Market are likely to occur due to the different corporate governance systems. Nearly all identified political connections in the present study are based on memberships on the supervisory board which duties are to give advice and control.