This paper analyzes the impact of changes in the winning chances of candidates running for the 2007 French presidential election on abnormal stock returns of firms that could benefit from a candidate's victory. We use prices formed by transactions on a political prediction market to reveal the probabilities of victory of S. Royal and N. Sarkozy. We find that changes in S. Royal's probability of victory have no impact on firms that should benefit from her party platform. On the opposite, abnormal returns of firms that should benefit from reforms announced by N. Sarkozy or that are directed or owned by his friends are positively correlated with changes in his probability of victory. Both effects appear to be independent and the network effect is fifty percents larger than the other one. All these results persist when we take into account specific characteristics of firms.
