Effects Of Public Sector Corruption On The Private Sector : Investigating The Market Value Of Political Connections

This paper exploits public announcements of corruption allegations amongst Nigerian political figures to estimate the impact of political connections on firm value. Specifically, I draw results from market reactions to 27 events to determine whether politically connected firms suffer more from financial malpractice amongst government officials. This paper finds heterogeneous impacts of corruption announcements for firms’ returns. For some events involving larger sums of misallocated funds, politically connected firms suffer greater losses in their returns than unconnected firms. For other events involving smaller amounts of missing funds, I find that unconnected firms are actually punished more than connected firms. Still for other events, there appears to be no significantly differential impact of a government corruption scandal on connected and unconnected firms. Furthermore, surprisingly, some events actually show a positive return for all firms, and when this is the case, politically connected firms experience a larger increase in returns than their unconnected counterparts. To identify an overall impact, I run a pooled regression aggregating over all the events studied. I find that on average, there is a negative albeit insignificant impact on the returns of politically connected firms relative to unconnected firms in the aftermath of a corruption scandal.