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Saturday, April 22, 2006

The Value of Getting Elected

Why is it that after politicians are elected the value of stock in companies they control rises? What are people expecting will happen?:

Are Rich Politicians Selfless Politicians? by Daniel Altman, Economic View, NY Times: ...Mara Faccio, an assistant professor of management at Vanderbilt University, looked at the cases of 109 capitalists and entrepreneurs who were elected to political office in 47 countries. She chose politicians in two categories: those who owned at least 10 percent of the shares of a publicly traded company (which many economists consider a controlling interest), and those who had been chief executive, president or vice president of such a company.

In a paper published in March in The American Economic Review, Ms. Faccio reported that the politicians' companies experienced a 2.3 percent increase in their share prices, on average, around the time of their electoral victories. If a politician entered the executive branch of government, the effect was larger — up to a 12 percent lift for companies associated with new presidents, prime ministers and other top officials. "The results suggest that the politician is acting in the interest of the company," Ms. Faccio said in an interview by telephone. "And the effects were much larger in countries with high corruption." ...

There could be a celebrity effect. If I own a restaurant and become president, maybe more people want to eat there and profits rise. But the variation across countries according to corruption suggests other forces are at work. The paper lists "preferential treatment by government owned enterprises (such as banks or raw material producers), lighter taxation, preferential treatment in competition for government contracts, relaxed regulatory oversight of the company in question or stiffer regulatory oversight of its rivals, and many other forms" as potential reasons for the change in the value of the stock. The NY Times article also discusses whether wealthier politicians are more independent but does not reach any definitive conclusions.

    Posted by on Saturday, April 22, 2006 at 05:32 PM in Economics, Politics | Permalink  TrackBack (0)  Comments (1)

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