The (In)Visibility of Undisclosed Political Connections

Extant research provides limited evidence related to the pricing mechanism of firms’ undisclosed political connections. Using events that led to losses of firms’ connections, we find that, on average, investors do not realize the losses when they occur, suggesting a lack of visibility of the connections. However, a small number of institutional investors know about the connections and abnormally sell their shares in response to the events. Employing both in-depth interviews and archival-based empirical analyses, we show that a high cost to acquire information and analysts’ lack of incentives to disseminate negative information they acquire contribute to the opacity. The lack of visibility leads to a significant delay in pricing the shock of losses of connections. We also demonstrate that price incorporation occurs gradually following the initial shock, potentially because investors infer the impact of the shock from firms’ investment decisions.