Implications of corporate political connections: evidence from campaign contributions in the United States

  • Rotana Sobhi AlKadi

Student thesis: Doctoral Thesis


Corporations have been actively engaging in the public policy process in an attempt to manage its impact on their businesses. The prevalent role of corporations within politics is controversial and there has been much discussion from diverse disciplines on the extent of corporations' influence on politics. Corporate finance literature that focuses on corporate political activities/connections has been investigating their determinants and consequences on firms' strategies and outcomes.Firms can build connections with politicians using several tactics. This thesis uses campaign contributions, i.e., firms' hard-money contributions to politicians in their (re)election campaigns through firms' Political Action Committees (PACs) over a rolling six-year window, to identify corporate political connections in the US context and investigate their association with some of the firms' strategies and outcomes within three empirical chapters.The first empirical chapter (Chapter 4) investigates whether corporate political connections are associated with their investments in R&D. It also investigates the impact of political connections on the association between executives' ownership and R&D. Using a sample of publicly-listed US (S&P1500) firms from 1992-2018, the findings show that those firms that support more politicians in their (re)election campaigns over a rolling six-year window have higher investments in R&D. The findings also suggest that the impact of political connections on the association between executives' ownership and R&D is not statistically significant. This insignificant impact might be due to the small within-firm changes in executive ownership concentration from year to year as suggested by Zhou (2001). Another possible explanation is the cancelling effect resulting from the interaction of the two variables (i.e., political connections and executive ownership).The second empirical chapter (Chapter 5) focuses on an area that has recently been widely considered in academia and practice, which is corporate environmental, social, and governance (ESG) practices. Studies suggest that corporate ESG bad practices have an adverse effect on business processes and threaten a firm's reputation and survival. Corporations may use several strategies, including their political ones, to mitigate risks that arise from ESG bad practices. In particular, this research focuses on firms' ESG negative/adverse incidents to evaluate if such incidents are associated with firms' long-term political connections. Using a sample of US listed firms from 2007-2018, it was found that firms with greater ESG negative incidents tend to have a higher intensity of political connections, measured by the number of supported candidates in their (re)election campaigns over a six-year rolling window. This chapter also examines whether each component of ESG negative incidents (i.e., Environmental, Social, and Governance) is associated with corporate political connections. The results show that the intensity of the association with corporate political connections varies across the three components of ESG, and that ESG incidents related to environmental issues are the main drivers of firms' long term connections with politicians. The chapter also investigates whether long-term corporate political connections can positively impact the association between the firms' negative ESG incidents and performance; the findings show that they do, particularly when market performance measures are used (i.e., Tobin's Q). This implies that having corporate long-term connections to politicians is a proactive strategy for the firm to mitigate their reputational risk, particularly the risk that arises from their ESG negative incidents. The third empirical chapter (Chapter 6) examines the existence of an association between corporate political connections and firm equity risk. By using a sample of S&P1500 firms from 1992-2018, this study finds that corporate political connections are associated with lower total risk (stock returns volatility), systematic risk, and idiosyncratic risk. It also examines a governance variable that has been considered to lower the firm's total risk, which is female representation in the Top Management Team (TMT). After validating that female representation in the TMT is related to lower firm total risk, the chapter then examines the possibility of corporate political connections impacting the negative association between female representation in the TMT and firm total risk; the results indicate that corporate political connections strengthen this negative association mainly by reducing the idiosyncratic risk.Overall, the findings suggest that corporate political connections in the US through long term hard-money contributions to political candidates in their (re)election campaigns are considered a valuable resource that is associated with higher investments in R&D (economic growth), and lower firm risk (total, systematic, and idiosyncratic). Such political connections can also be considered as a means to mitigate the reputational risk arising from the firm's negative ESG incidents.
Date of Award20 May 2022
Original languageEnglish
Awarding Institution
  • University Of Strathclyde
SupervisorDavid Hillier (Supervisor) & Krishna Paudyal (Supervisor)

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