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The Value of Political Connections in Fascist Italy

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Stock Market Returns and Corporate Networks 

Recent years have witnessed the flourishing of a body of economic literature concerned with the search for empirical evidence of a positive relation between political connections, economic rent and the value of firms. As a brief survey of some of these works will show, we find in this literature a wide range of definitions of “political connectedness” – from (broadly understood) personal relationships between firms’ owners or the members of its boards and politicians, through financial support offered by firms to electoral campaigns, to the political positions held (now or in the past) by directors of the boards.

Johnson and Mitton (2003) present empirical evidence that, in September 1998, Malaysian firms with strong personal ties to the Prime Minister Mahathir benefited from the imposing of capital controls. Khwaja and Mian (2005), by contrast, classify a Pakistani firm as “political connected” if its director participates in an election, and offer accordingly a quantitative estimation of the rent costs of politically connected firms in banking for the Pakistani economy in the years between 1996 and 2002. Faccio et al. (2006), however, do not include contributions to political campaigns or direct (undisclosed) payments to politicians in the definition of political connectedness that they employ in their examination of the link between political connections and corporate bailouts in 35 countries over the period 1997 through 2002. In their study, a company is defined as politically connected if at least one of its top officers or a large shareholder (that is, controlling at least 10% of the company’s voting shares) was head of state, a government minister, or a member of the national parliament, as of the beginning of 1997. Moreover, they take into consideration forms of indirect connection, such as family ties between a head of state or minister and a top officer or a large shareholder, or the well-known “friendship” of a top executive or a large shareholder with a head of state, government minister, or member of parliament.

In analysing the development of China’s private sector, Li et al. (2008) define political connection on the basis of the personal affiliation of the owners of private firms with the 

ruling Communist Party. They find that, in a transition economy such as China, political connections have a positive effect on firm performance, represent a differential advantage in obtaining loans from banks or other state institutions and make firms more likely to resort to the courts in business disputes than their less well-connected counterparts.

More recently, Civilize et al. (2015) define a Thai firm as politically connected in the period 1985-2008 whenever there is evidence of an affiliation or a remote familiar tie of members of the boards with the Prime Minister, cabinet members, or parliament members (both of coalition and opposition parties). Thailand represents one case of a ‘crony economy,’ and this research finds that, in an economy where rent seeking (through political connections) is essential and competed for, investors in the stock market systematically bid up the stock prices of politically connected firms.

The present article is a contribution to this literature dealing with the quantitative measurement of the value of the political connections. Our work proposes, for the first time, a quantitative measurement of the value of political connections between Italian firms and the Fascist regime in the years of Benito Mussolini’s rise to power (1921-1925). Specifically, the present paper offers a quantitative answer to the question: how much was it worth to have close, early connections with the National Fascist Party (hereafter, PNF)?

We define a firm as politically connected when historical research has demonstrated that its owners (or the major shareholders) early joined the PNF or has shown the existence of any form of financial support to Mussolini’s political project in its initial stages. With regard to the latter criterion, we have complemented the current knowledge of the flow of capital that financed Mussolini’s political project in its initial stages by surveying the pages of his newspaper in order to identify the companies that purchased advertising space during the first year of its publication (November 1914-December 1915).

Event analysis is one of the methodologies that has been successfully employed in the measurement of the differential advantage deriving to firms from being politically connected. In a nutshell, an event study allows us to measure the impact of a specific event on the value of a firm as, given rationality in the marketplace, security prices reflect the effects of this event (MacKinley, 1997; Campbell et al., 1997).

Fisman appears to have been the first to employ modern event analysis in his 2001 work on Indonesia. In order to measure the value to firms of political connection with President Suharto, Fisman performs an event study of the Indonesian stock market on the occasion of some episodes concerning adverse rumours about Suharto’s health in the last years of his office. Fisman’s work has been complemented by Faccio’s (2006) analysis of the common characteristics of political connected firms among 20202 traded firms in 47 countries, which performs event studies around the time of announcements that officers or large shareholders are entering politics, or politicians joining boards.

Bunkanwanicha and Wiwattanakantang (2009), use event studies to provide empirical evidence of the economic incentives enticing big business owners to seek election to top public office. Their case study is Thailand, where, in January 2001, and for the first time, a group of business tycoons won the general election. By means of an event study, Bunkanwanicha and Wiwattanakantang show, not only that the political power of firms’ owners accounted for the extraordinary incremental gain in market valuation and market share, but also that the business tycoons used public office to expand their corporate control.

Another recent example of the application of the event study approach is the work of Chekir and Diwan (2015), who examine the nature and extent of Egyptian ‘crony’ capitalism. Specifically, they compare the corporate performance and the stock market valuation of politically connected firms before and after the 2011 popular uprising that led to the end of President Mubarak’s rule.

In our engagement with Fascist Italy, the methodology employed in the work of Ferguson and Voth (2008), who studied the reaction of the German stock market to the Nazi seizure of power, constitutes our main point of reference. Specifically, we perform an event study in order to analyse the reaction of Italian stock market investors to the March on Rome (Marcia su Roma), the Fascist military expedition of 28th October 1922 with which the first Mussolini government unexpectedly began. However, because of the peculiarity of the Italian stock market, in contrast to Ferguson and Voth, and more broadly to the existing literature on the quantitative estimation of the value of political connectedness, we innovatively adopt a social network analysis in order to identify politically connected firms.1 To our knowledge, this is the first time that a network analysis has been employed in an event study.