For better, for worse: the value of political connections during regime change

Using a rare and unexpected political event, where the unexpected loss of the incumbent political regime takes place, we examine the value of political connection. We find that the market reacts negatively to firms that are connected to the old regime. We also find that market reaction takes into account the length of connection and the internal as well as external governance mechanisms in connected firms. The role of independent director within the board of directors and audit committee could not alleviate the negative
market reaction for firms that are connected to the old regime. We document institutional ownership can explain the negative market reaction towards connected firms. The negative market reaction towards firms connected to the old regime is exacerbated with the ownership of the foreign institutional investors.