Valoración De Variables Cualitativas Aplicadas A La Ciencias Contables

The relationship between military rule and asset pricing has attracted very little attention from finance researchers. From a sample of ten emerging markets where military rule is common, this study provides evidence that there is no significant difference in stock returns between military and civilian governments for eight of the ten markets being examined. Such a finding indicates that military rule is not a stock price factor in these eight emerging markets.

However, there is evidence for military returns premiums in two markets being those of Pakistan and Thailand. The stock returns under military governments for these two markets are significantly higher than under civilian ones. These military returns premiums are additional to what could be explained by the economic cycle fluctuation, extreme stock market slumps, error term, and stock market volatility. Besides, this finding holds when allowing for world returns correlations, persistence in dummy variables, and randomisation- bootstrap robustness checks.

Despite the fact that a highly profitable trading strategy based on the prediction of the occurrence of a coup is almost impossible to be designed due to the unpredictability of its occurrence, the findings show that holding or investing in either Pakistani or Thai stock markets during a period of military control can provide an opportunity for a military return premium. Moreover, the findings also show that the periods of military governments for these two countries do not necessarily accompanied by financial market shocks and fluctuations due to the changes in policies made by military-led cabinets and the suppression of democracy to its lowest echelon. This contradicts the customary view of the financial markets during periods of military governments.

151 As a result, this study provides important knowledge for investors on their portfolio formations and allocations of investments. Particularly for those who would like to invest in Pakistan and Thailand, this study brings to light how such a shift from civilian to military government does not increase the risk level of their investment portfolios. However, it must be remarked that such military returns premiums observed in these two countries appear to be country-specific and thus cannot be applied to all countries under military governments.

Lastly, it must be noted that Pakistan and Thailand, as well as many other emerging markets, are relatively new democratic countries where democracy is still not yet fully developed. Also, the rule of law is still not truly and effectively exercised. The root of military coups typically comes from intolerable abuse of power by political figures and corruption, especially within a government (Hopkins, 1966; Jackman, 1976; and Pinkney, 1990). As asserted by Winichakul (2008), it is well-known that corruption and abuse of power for personal interest is particularly widespread and they are common problems in the electoral politics of emerging markets. Such common problems have remain unsolved for many

decades and it is likely to remain a problem unless there is a major reform on the country’s political structure together with a radical change in politicians’ attitude and morality. Without

these changes, these prior studies suggest that the military-civilian-military political cycle is likely to be seen yet again in the future. For this reason, this study on the effect of political regimes on stock returns provides important information for prospective investors who seek to invest in emerging capital market, particularly in Pakistan and Thailand.

Given such a unique characteristic of Thai’s equity market, the next chapter presents the third essay of the thesis which examines the relationship among corporate political connectedness, stock returns, and firm values in Thailand. Particularly, the study is interested to examine whether the level of political connection is a stock price factor in Thailand and whether there

are differences in firm’s financial performances among firms with different level of political connection.

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CHAPTER FIVE

ESSAY THREE:

POLITICAL CONNECTIONS & STOCK RETURNS

This chapter presents the third essay which investigates the relationship among political connectedness, stock returns, and firm values in Thailand. A brief overview of the influences of political connectedness on Thai businesses is provided in Section 1 of the chapter. Section 2 discusses prior evidence on the link between political ties and Thai equity markets. Section 3 proposes the hypotheses. Section 4 provides data description and descriptive statistics. Sections 5 and 6 present the test methodologies and empirical results, respectively. Section 7 outlines the series of robustness tests. Sections 8 and 9 discuss the results and conclude this

essay, respectively. The essay’s appendix and reference list is presented in the last section of this thesis.

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5.1 INTRODUCTION

There is international evidence of the relationship between political connections and firms values. These are documented for countries with weak as well as strong legal systems. However, the findings from these studies are inconclusive. Ang, Ding, and Thong (2010) and Wu, Wu, and Rui (2010) suggest that the country’s institutional environment is likely to be the main influencing factor of conflicting results. It is found by Faccio (2006, 2010) that political connections are most valuable for countries with weak legal systems, high government intervention and corruption. All of these are the characteristics of emerging markets in general.

Accordingly, it is documented by, for example, Fisman (2001), Fraser, Zhang, and Derashid (2006), and Luez and Oberholzer-Gee (2006) that there is a potential link between political patronage and firms in the Asian emerging markets. Furthermore, Johnson and Mitton (2003) and Imai (2006) also provide evidence that politically connected firms in Asia benefit from private economic rents in addition to being exempt from certain rules and regulations. These priorities help politically connected firms to gain higher market share and profitability than non-connected firms; and, for this reason, there are pressures placed on firms in establishing and maintaining political ties in order to remain competitive. Such a reliance on political power points toward an inseparable nexus between politicians and businesses in these markets.

Whilst the above facts are well documented, the relationship between political connectedness and stock performance in the Asian emerging markets still receives little attention from finance researcher. Despite the fact that politically connected firms receive higher protection and greater economic benefits, it remains questionable as to whether the stock market participants would incorporate such a factor into their investment decisions and whether this would be a factor in stock pricing. This study aims to fill this gap in the current literature and answer these questions by focusing on one particular Asian emerging market, Thailand. This is because it is one of the Asian emerging markets where there is a solid presence of large politically powerful business groups. More importantly, politics in Thailand is renowned to

154 be strongly associated with corruption, cronyism, and economic rent-seeking. Altogether, this makes it an ideal venue to conduct this type of research.

In financial theory, the efficient market hypothesis (EMH) suggests that stock prices in an efficient market reflect all known information. It is therefore arguable that one should not observe any differences in stock returns since publicly available information should already be fully reflected in stock prices of an efficient market. However, in the case of political connections in Thailand, it can be difficult to trace corporate political connectedness through publicly available information since there is close public scrutiny on listed firms for any misconduct such as insider trading. Moreover, Thai politicians also have to conceal their affiliations to firms so as to avoid violating the law20. Hence, politicians often use nominees and shell entities to reduce transparency and obscure the true connections between firms and themselves. This makes corporate political connectedness to be unobservable at the surface level and a thorough investigation is required to reveal the link between two parties. It is therefore believed that the Thai stock market offers an attractive research setting and provides the unique opportunity to analyse the impact of political connections where information on such connections could not be fully priced.

This study sheds further lights beyond previous literatures such as Imai (2006), Chantrataragul (2007), and Bunkanwanicha and Wiwattanakantang (2009) that investigate the relationship between political connectedness and firm performance in Thailand. However, the level of investigation in this study is more comprehensive than the earlier ones in at least four aspects: (1) the scope of study; (2); the sampling period; (3) the levels of political connection; and, (4) industrial analysis.

Firstly, this study aims to investigate the effect of political connections on stock performance in addition to the accounting performance of listed firms in Thailand. Despite the fact that these two performance measurements may be interrelated since investors generally rely on

firms’ fundamental values in their stock selection process, an investigation on how political

20 _{Under Section 4,5,6,16,17,and 18 of the Management of Partnership Stakes and Shares of Ministers Act}

155 connectedness has an impact on both stock and accounting performance remains essential. Such an investigation will provide a comprehensive outlook on the relationship between political ties and firm values in Thailand. To the researcher’s knowledge, no prior studies have yet examined the effect of political connections on both of these firms’ performance concurrently.

Secondly, the sample period of this study dates back until 1987. This is when the stocks become actively traded since the start up of the Stock Exchange of Thailand (SET) in 1975. To date, the existing literature only covers the period of 2001 to 2004. Since the Thai’s Securities Exchange Commission (SEC) was not established until 1992, the earlier period is particularly interesting for analysis. This is especially true in light of corporate governance regulations which are weakly enforced on listed firms21. Moreover, restrictions on the relationship between politicians and firms were also virtually absent at that time. This provides opportunity for firms to allocate their shares to politicians and use inside information to influence stock prices for large profits (Sitthipongpanich, 2004).

Thirdly, it is found by Faccio (2010) that politicians do not have equal influence in all countries. Using the data from 1996 to 1999, she finds that connected firms in 47 sample countries have stronger market power than non-connected firms. Moreover, there are differences in market power among politically connected firms. Particularly, firms connected to the Prime Minister are found to have greater market power than those connected to Members of the Parliament. Such a finding motivates this study to investigate whether the different levels of political connection between the Thai executive body and publicly listed firms are fundamental in explaining the stock returns and financial performance of firms in Thailand. Specifically, this study tests whether firms with connections to the Prime Minister have superior stock and financial performance than firms with other types of connections.

21 _{Listed firms in Thailand are often being charged with lack of good corporate governance practice. See, for}

example: Alba, Claessens, and Djankov (1998); Pomerleano (1999); and, Claessens, Djankov, Fan and Lang (1999).

156 Accordingly, the connections to politicians are categorised into four levels. These consist of the connections to: (1) Prime Minister; (2) Cabinet Members; (3) Members of Parliament within coalition parties; and (4) Members of Parliament within opposition parties. Furthermore, the connections within listed firms are also being distinguished into those connected through the Board of Directors or shareholders. It is believed that such an investigation distinguishes this study from all existing literature. To the researcher’s knowledge, this study is the first to carry out such a detailed investigation on political connections for the Thai securities market.

Lastly, prior studies find that entry and the ability to obtain projects in certain sectors in Thailand are based on the strength of political connections (Pathmanand, 1998; Intarakumnerd, 2000; and, Intarakumnerd, Chairatana, and Tangchitipiboon, 2002). This is particularly the case for restrictive industries such as resources and telecommunication. Such findings imply that, for a given industry, political connections and the level of connection can have significant impact on the economic life of Thai firms. Therefore, this study investigates and provides evidence as to whether the different levels of political connection are important in explaining stock returns for each of the industries in Thailand. Besides, it aims to highlight whether the impact of different levels of political connection on stock returns varies across the different industries. Since firms in a restricted and highly competitive industry require more protection and preferential treatments from politicians than firms in other industries, it is conjectured that the impact of different levels of political connection on stock returns would vary from one industry to another. This study is believed to be the first to conduct such an analysis on Thai securities market.

This study is organised as follows. Section 4.2 discusses prior evidence on the relationship between political ties and the Thai equity markets. Section 4.3 proposes the research objectives and hypotheses. Section 4.4 provides data description and descriptive statistics. Section 4.5 outlines the test methodologies. Sections 4.6 and 4.7 present the empirical results and robustness tests, respectively. Section 4.8 discusses the results and Section 4.9 concludes this study.

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