The value of political connections and Sharia compliance during the COVID-19 pandemic

ABSTRACT

The relationship between the COVID-19 pandemic and the stock market has been well documented in other studies. However, thus far, researchers have shown little interest in the role of political connections and Sharia compliance during the pandemic. This study offers novel evidence by investigating the value of both political connections and Sharia compliance during the present pandemic. We use two kinds of analysis. First, using the event-study methodology, we measure the stock market reaction to the COVID-19 pandemic. Second, to further sharpen our identification of the value of political connections and Sharia compliance during the current pandemic, we use a pooled regression analysis. We find that there was a stock market anomaly during the COVID-19 pandemic in Indonesia in that the pandemic had a positive impact on the stock market. We also find that there was value for firms in being Sharia-compliant during the pandemic when the government announced tax incentives for firms. Based on these results, we offer insights relevant to policymakers and financial market authorities seeking to enhance the effectiveness of policy measures during the COVID-19 pandemic. In addition, our study also has important implications for individual investors.