Washington Obituaries Offer Short-Sale Tip Sheet: Caroline Baum

Commentary by Caroline Baum

June 15 (Bloomberg) -- Everyone knows money buys influence. The entire lobbying industry is based on that premise.

Businesses hire teams of people to represent their “interests” to members of Congress. Lawmakers listen, and should they find those interests compelling enough to warrant, say, a tax credit or the insertion of another loophole in the already holey tax code, said lawmakers may find themselves richly rewarded.

Knowing a quid-pro-quo exists and quantifying the value of political connections are two different matters. For example, earlier this month Barney Frank, the powerful Democratic chairman of the House Financial Services Committee, persuaded General Motors Corp. Chief Executive Fritz Henderson to delay the closing of a GM parts distribution center in Norton, Massachusetts, which is in Frank’s district. (Frank also intervened to secure a $12 million cash injection from the Treasury’s Troubled Asset Relief Program for OneUnited, a troubled Massachusetts bank.)

It sure looks as if the government’s stake in GM helped to persuade Henderson of the importance of saving the 80 jobs at the Norton center. Is there a way to determine how much it was worth to him?

Academics have tried to put a price tag on political connections, but often the ties between business and politicians are unknown or too hard to uncover. In many countries, information on lobbying and political contributions isn’t available to the public the way it is in the U.S.

Sudden Death Syndrome

Vanderbilt University economics professors David C. Parsley and Mara Faccio use a new approach to quantify political influence. In “Sudden Deaths: Taking Stock of Geographic Ties,” a paper that will appear in the June issue of the Journal of Financial and Quantitative Analysis, the authors put a price on how much local politicians help their local constituencies.

Specifically, they examine the stock price reactions following the sudden death of a local politician.

Parsley and Faccio begin with the premise that politicians favor local enterprises for obvious reasons: They need votes to get re-elected, they have family and friends in the district, they care about local jobs, etc.

Using geographic location as the framework for their analysis, the economists then use an unanticipated event -- the sudden death of a politician -- to tease out the effect on companies based in the same town. (Because the stock market incorporates all available information, only an unexpected event can be used to measure the reaction.)

‘Statistically Robust’

What they found from their worldwide study of 8,191 companies and 122 sudden deaths since 1973 was a 1.7 percent decline in geographically connected firms, meaning those companies headquartered in the town in which the politician was born or lived.

That didn’t sound like a lot to me, so I called Parsley with some questions.

“Political connections do have an impact, they are measurable, and it’s not just isolated cases,” he said. “By looking at sudden deaths, we get an idea of what the market thinks the connection is worth. Now it’s worthless because the person is dead.”

Is a 1.7 percent decline in the stock prices of those companies relative to the overall market “statistically robust,” as economists like to say?

“We haven’t been able to make it go away even though we tried different specifications and controlled for everything we could think of,” he said.

Zimbabwe Is Last

Parsley said the effect was greater if the politician sat or chaired an important committee. In those cases -- if the geographically connected company was a bank, and the politician was chairman of the Senate Banking Committee -- sudden death produced an average 4 percent decline in the stock price relative to the overall market.

Not surprisingly, there was wide variation across countries, with sudden death leading to an average 4 percent decline in politically connected companies in the U.S. and 10 percent in Zimbabwe. Connections matter a lot more to publicly traded family-owned businesses, which has implications for the overall economy.

“To the extent that politicians favor inefficient (family) firms by allocating resources to them, long-term economic growth will also be reduced,” according to the paper.

In addition, the authors found that politically connected firms “suffer a statistically significant decline in sales growth” and access to credit between the year prior to the sudden death and the year after.

Health Care Initiative

Is there a message in all this?

“Stock prices should be unpredictable; nobody can predict them,” Parsley said. “Yet we have a model that can predict stock returns.”

He’s not suggesting we commit murder most foul and trade off it. It is possible, based on the results of the study, to stay on top of the obituaries, short some politically connected companies and walk away with a profit.

I started to think about the broader implications, now that many of the nation’s largest companies, including banks, insurance companies and auto manufacturers, are connected not only to their local politician but to the federal government, up to and including the president. What happens if Barney departs for that great domed chamber in the sky?

Given the impact of sudden-death syndrome on a company’s stock price, we might want to mandate and underwrite more health and wellness programs for our elected representatives.