Friday, July 27, 2012

"What Happened to Companies Connected to Geithner after News Leaked He was to be Appointed Treasury Secretary? "

From MIT via the HBS:

The Value of Political Connections in the United States

The announcement of Timothy Geithner as President Obama’s nominee for Treasury Secretary in November 2008 produced a cumulative abnormal return for Geithnerconnected financial firms of around 15 percent from day 0 (when the announcement was first leaked) to day 10. The quantitative effect is comparable to standard findings in emerging markets with weak institutions, and much higher than previous studies have found for the United States or other relatively rich democracies. The results hold when we control for how much firms were affected by the financial crisis, as well as in a wide range of other robustness checks. There were subsequently abnormal negative returns for connected firms when the news broke that Geithner’s confirmation might be derailed by tax issues. Since the Geithner nomination announcement, policy has been supportive of the financial services sector and Geithner-connected firms have continued to show positive cumulative abnormal returns, but there is no compelling evidence that Treasury implemented the exact form of favoritism implied by the stock market reaction. Our results pick up market expectations and the perceived value of connections at a moment of intense financial crisis, rather than how policy was subsequently designed or implemented.

78 page PDF

HT: Economic Policy Journal