Political Networks and Stock Price Comovement: Evidence from Network-connected Firms in China
Abstract: In this paper, we examine whether comovement in the stock returns of pairs of Chinese firms connected to the same political network are systematically shaped by the prevailing coordination vs. competition incentives of the network’s politicians. We find strong evidence that stock price comovement is affected by the embeddedness of the firm-politician tie within the network. Among pairs of firms connected to a network through a common politician, we document an increase in stock return comovement. For those pairs of firms connected to a common network via separate politicians (rather than a common politician), we document a relative decrease in stock return comovement. This negative effect suggests that the politicians’ relationships within these political networks are generally adversarial rather than cooperative in nature. This interpretation is supported by evidence that stock price comovement becomes even more negative (positive) in settings which are expected to increase competition (coordination) between the separate politicians (by the common politician).