Betting on presidential elections: Should we buy stocks connected with the winning party?

• This study discusses whether political connection affects investor trading decisions.
• We examine the share trading of investors in Taiwanese presidential election.
• We classified investors into two categories: more and less PC-based investors.
• Foreign investors are more PC-based investors.
• Insider and individual investors are less PC-based investors.

This study discusses whether political connection (PC) affects investor trading decisions. We approach the issue by examining the equity share trading of foreign investors, insiders, and individual investors, and the stock returns of politically connected firms in the 2008 Taiwanese presidential election. We classified investors into two categories, namely, more PC-based and less PC-based investors. More PC-based investors invest more in firms connected with the winning party and obtain higher abnormal returns, whereas the opposite holds for less PC-based investors. We posit that foreign investors are more PC-based, whereas insiders and individual investors are less PC-based. Evidence suggests that PC is influential in the trading decisions of investors.