Elections and political risk: New evidence from the 2008 Taiwanese Presidential Election

We examine the effects of party platforms on the economic opportunities of firms using a unique data set from a political prediction market in Taiwan, a country with two dominant parties whose political cleavage derives mainly from a single issue: the “One China Principle”. We find that during the 2008 Presidential campaign, the share price of Taiwanese firms with investments in the mainland responded strongly and positively to a positive electoral outlook for the KMT, the party which advocates lifting caps on cross-strait investment in mainland China. The response is strongest for those firms who have already hit their caps.

Research Highlights
► We study firms' abnormal returns during the 2008 Taiwanese Presidential election.
► Prediction markets measure weekly variation in parties' probability of victory.
► Firms with larger mainland investment suffer lower returns when DPP victory likely.
► Firms near the investment cap exhibit no additional vulnerability to DPP victory.
► Thus transactions costs and appropriations risk seem more important than the cap.