Political affiliation and abnormal stock returns around elections: an event study from Bangladesh

Purpose - This study examines whether political affiliation influences stock market reactions to national elections in an emerging economy like Bangladesh. It investigates how firms affiliated with the Bangladesh Nationalist Party (BNP), the victorious party, respond to the most recent national election. Given the close ties between business and politics in Bangladesh, the election provides a natural setting to assess how political information is incorporated into stock prices. Methodology - Using an event study methodology, the study analyzes daily stock returns of 21 BNP-affiliated firms and a matched sample of 21 non-affiliated firms listed on the Dhaka Stock Exchange. Non-affiliated firms are matched by industry and firm size to isolate the effect of political affiliation. Abnormal returns are estimated using the market model, and cumulative abnormal returns are calculated over short event windows around the election. To examine whether stock price reactions reflect changes in firm fundamentals, the study also analyzes quarterly EPS and NAV for BNP-affiliated firms in the two quarters preceding the election. Findings - The findings show that BNP-affiliated firms experience positive and statistically significant abnormal returns on the first trading day following the election and earn significantly higher cumulative abnormal returns than non-affiliated firms over short post-election windows. In contrast, non-affiliated firms exhibit no significant market reaction. Importantly, no significant changes are observed in EPS or NAV prior to the election, suggesting that the stock price reaction is not driven by contemporaneous improvements in firm performance. Conclusion - The results indicate that investors capitalize expected political benefits into stock prices following a decisive election outcome. The study contributes to the literature on political connections by providing firm-level evidence from Bangladesh and highlighting the role of political affiliation in shaping investor expectations in emerging capital markets. Keywords: Political connections, stock market reaction, election, event study, Bangladesh