Measuring the extent and implications of corporate political connections in prewar Japan

This paper explores the extent of political connections of firms, and examines the implications for firm values, using firm-level data from prewar Japan. We collect data from publicly traded companies in Japan in the late 1920s and early 1930s regarding their directors and presence of members of the House of Representatives, stock prices, and financial performance. We find that almost 20% of these publicly traded companies had political connections through politician directors. In particular, firms in regulated industries, including the electrical utility and railroad industries, were more likely to have political connections. Regression analyses reveal that the stock returns of firms with newly- obtained political connections improved from the pre-election to post-election periods. Furthermore, this positive effect accrued to non-regulated industries, while it did not to regulated industries.