Do Political Connections Pay for Pledging of Shares: Evidence from India

This study explores the stock-pledging conduct of promoters or controlling shareholders in Indian companies with political affiliations. Using a sample of publicly listed companies on the National Stock Exchange (NSE) in India, covering the period from 2009 to 2019, we investigate how the capital generated from promoters' stock pledging influences their investment decisions in higher-risk projects. Additionally, the study examines the negative consequences of stock-pledging activities by evaluating the pressure from margin calls. The results reveal a significant reduction in corporate investments among firms involved in stock-pledging activities. However, promotors of politically connected firms actively engaging in stock-pledging tend to invest in projects with elevated risk. Furthermore, politically affiliated firms demonstrate lower volatility in stock returns than their non-connected counterparts. These findings suggest that firms' political connections serve as a protective factor, mitigating both investment risk and the volatility of returns.