Corporate political strategies

Corporate political strategies

Ike Mathura, Manohar Singhb

aDepartment of Finance, Southern Illinois University, Carbondale, IL 62901-4626, USAbThe Pennsylvania State University, Great Valley School of Graduate and Professional Studies,

Malvern, PA 19355, USA

Abstract

The paper offers a comprehensive and integrative review of the current literatureon corporate political strategies sharing common boundaries with finance,accounting and corporate governance. While there appears to be a heightenedinterest among researchers in studying the value relevance of corporate politicalstrategies [Chen et al. (2010), Goldman et al. (2009), Cooper et al. (2010), Rich-ter et al. (2008), Hochberg et al. (2007), de Figueiredo and Edwards (2007), Fac-cio and Parsley (2009), and Myers (2009) among others], interestingly, financeand corporate governance scholars have yet to embrace the research on politicalstrategies as part of their mainstream research. Taking a micro perspective at thefirm level, we review the major scholarly works in the economics, finance andmanagement disciplines with respect to the firm attributes shaping the corporatedecision to engage politically, modes of corporate political participation, and thevalue impact of corporate political activity. The overarching theme of the reviewarticle is to integrate diverse – political economy and management – paradigmsof corporate political participation and rationalize the value relevance within thecorporate finance and corporate governance perspective. The paper also presentsfocused preliminary evidence on the determinants and value impact of corporatelobbying strategies. For the sample of 5452 firm-year observations, the resultsindicate that while for large firms corporate lobbying may not be agency drivenand may create value, for small firms, despite low shareholder rights associatingwith higher lobbying engagements, lobbying still relates positively to valueadded.

Key words: Corporate political strategies; Shareholder rights; Agency conflict;Lobbying

JEL classification: G30

doi: 10.1111/j.1467-629X.2010.00386.x

Received 17 March 2009; accepted 1 October 2010 by Robert Faff (Editor).

� 2010 The AuthorsAccounting and Finance � 2010 AFAANZ

Accounting and Finance 51 (2011) 252–277

1. Introduction

Although the extant literature in political science and economics suggeststhat businesses value political connections, and political engagements are a sig-nificant part of the overall corporate nonmarket strategies, most of theresearch on political engagements of businesses seems to fall short on both thetheoretical and the empirical dimensions. Current research seems to combine anumber of diverse paradigms from a variety of disciplines without furnishing acomprehensive integrated theoretical framework to analyse corporate politicalstrategies. Empirically, there is a lack of robust evidence on the determi-nants of corporate decisions to engage or otherwise in political activities, theirmodes of political participation and the performance impact of their politicalstrategies.Getz (2002: 306) highlights that ‘…there is not even an agreed upon the-

ory of … political strategy … literature provides inconsistent explanations ofwhy firms become politically or publically engaged and how firms go abouttheir political and public activities.’ Further, with respect to the value rele-vance of corporate political strategies, Getz (1997: 64) concludes, ‘[While] wehave a very good understanding of which firms engage in corporate politicalaction (CPA) and their rationales for doing so … we are not certain aboutthe effectiveness of tactics … Our least complete understandings revolvearound the ways that CPA changes over time and the setting in which CPAoccurs.’Recently, while there appears to be a heightened interest among researchers in

studying the value relevance of corporate political strategies [Chen et al. (2010),Goldman et al. (2009), Cooper et al. (2010), Richter et al. (2008), Hochberget al. (2007), de Figueiredo and Edwards (2007), Faccio and Parsley (2009), andMyers (2009) among others], clear and conclusive evidence is missing (Brasherand Lowery, 2006). More interestingly, finance and corporate governance schol-ars have yet to embrace the research on political strategies as part of the main-stream research.Given the gaps in our understanding of the corporate political strategies and

the multitude of perspectives spread over a diversity of academic disciplines, thispaper aims to provide a comprehensive and integrative review of the currentliterature sharing common boundaries with finance, accounting and corporategovernance.

1.1. Our focus

The paper takes a micro-firm level perspective and reviews the major scholarlyworks in the economics, finance and management disciplines with respect to thefirm attributes shaping the corporate decision to engage politically, modes of cor-porate political participation and the value impact of corporate political activity.The overarching theme of the review article is to integrate diverse – political

I. Mathur, M. Singh/Accounting and Finance 51 (2011) 252–277 253


economy and management – paradigms of corporate political participation andrationalize the value relevance within the corporate finance and corporate gover-nance perspective.While there have been extensive literature reviews on corporate political activi-

ties in management (Shaffer (1995) and Hillman et al. (2004)), to the best of ourknowledge, this is the first attempt to synthesize topical research from the financeand governance perspectives. We specifically focus on scholarly work publishedsince 2000 in the fields of economics, management and finance. We structure ourreview around four fundamental research questions addressed in the literatureon corporate political strategies:

• What motivates firms to associate with political institutions and participatein political processes?

• What are the modes of participation in political processes?• What are the consequences of political participation or absence thereof?• Is the value relevance of political strategies conditioned by corporate gover-

nance?

The theoretical underpinnings and relevant empirical evidence from across thedisciplines are synthesized as answers to the above-mentioned four questions.Throughout the paper, the central theme of corporate finance and corporategovernance is maintained. After taking stock of the current knowledge on theissue of corporate political strategies, the paper presents focused preliminary evi-dence on the determinants and value impact of corporate lobbying strategies.Finally, we discuss major gaps in our understanding of the multifaceted issuesand identify future areas of research.

2. Rationale and determinants of corporate political activities

On the issue of motivation behind corporate political contributions, twoschools of thought are developing and at best some inconclusive and mixedevidence has started to emerge. On the one hand, it is argued that politicalcontributions are aimed at generating value for shareholders by influencingpolicy decisions in favour of the contributing firm. This line of argumentsuggests that contributions can favourably influence the election out-come and/or policy stance taken by the supported candidates. In this para-digm, political contributions are perceived as valuable investments thatwould result in improved firm performance and greater wealth for theshareholders.On the other hand, researchers argue that political contributions may be a

manifestation of managerial ‘consumption’ preferences. Within this framework,the argument suggests that corporate contributions reflect managerial perquisiteconsumption. The logical inference from this agency-theoretic argument is that

254 I. Mathur, M. Singh/Accounting and Finance 51 (2011) 252–277


political contributions are wasteful expenditures and are more likely made by thefirms with lax governance standards.

2.1. Firm as a rational value maximizing entity

The former view of corporate political activities treats a firm as a value maxi-mizing rational business entity. Hart (2010: 3) suggests that for a rational valuemaximizing corporate entity, ‘‘… if the expected benefit of a political expenditureis greater than the expected benefits of alternative investments that the firmmight make, the cost is incurred. The firm thus operates on what might be calleda ‘political possibility frontier’ (analogous to the production possibility frontierin economics) in which its political resources are efficiently invested across policyareas, jurisdictions, and tactics.’’ This framework helps us identify a wide varietyof firm characteristics that may explain a firm’s decision to engage politicallyand the degree of such engagement in terms of capability (to incur politicalinvestment cost) and incentives (expected benefits). Researchers have identifiedthe following common firm attributes that explain a firm’s decision to lobby ormake political action committee (PAC) contributions.

2.1.1. Firm size

It is suggested that larger firms engage politically to a greater degree as theyhave greater capacity and incentive to do so. Schuler and Rehbein (1997) suggestthat firm size represents a firm’s ability to engage in political activities. A positiverelation between size and political engagement has also been rationalized interms of free riding by smaller firms. Hart (2010) suggests that a rational valuemaximizing smaller firm would choose not to utilize resources for political activi-ties, especially those that are aimed at providing collective benefits for the indus-try as a whole. Smaller firms would, in general, free ride on the efforts of largerplayers. Cooper et al. (2010) report that firms making contributions throughPACs are significantly larger than noncontributing firms. Their sample time-ser-ies average of the yearly median capitalization of contributors is $1.6B versus$195M for the noncontributing firms. Similarly, Hansen and Mitchell (2000) andBrasher and Lowery (2006) show that firm size is an important determinant oflobbying. Other studies (see, for example, Hansen et al., 2005; Drope and Han-sen, 2006) report that several of their sample firms do not make campaign contri-butions or engage in lobbying. Evidence (Cooper et al., 2010) also suggests thatlarger firms support more candidates. Cooper et al. (2010) report that in a typi-cal year, only 7.2 per cent of publically listed firms are contributing firms. How-ever, in terms of market value, those firms represent about 48 per cent of totalmarket capitalization. The numbers reveal that firms participating in the politicalprocess are very large firms. Cooper et al. (2010) also report that firms with rela-tively greater number of business and geographical segments are more likely tomake PAC contributions.



2.1.2. Risk

Stock volatility is a measure of risk and information asymmetries in finance.Return volatility also captures the lifecycle stage of a firm (Pastor and Veronesi,2002). Greater volatility reflects firms that are at an early stage of their lifecycle,are smaller, and have greater future uncertainty. Myers (2007) reports that firmswith lower return volatility are politically more active. In fact, next to size, vola-tility is the most reliable and significant predictor of political activity. Myers(2007) also provides evidence that while the interest coverage ratio does notexplain PAC formation, firms with a lower interest coverage ratio have higherlevel of political activity in terms of PAC contributions made.

2.1.3. Leverage

Within the corporate finance perspective, depending upon the degree of debtfinancing, leverage can impact corporate value either positively or negatively.Interest tax deductibility makes debt financing a cheaper source of funding andhence adds value. However, too much debt financing can increase the probabilityof financial distress and hence, increase the cost of debt and equity financing,leading to negative value consequences. From a corporate governance angle,leverage represents a bonding mechanism that reduces the possibility of manage-rial agency conflict. Thus, if political activities are agency driven, high leveragemay relate to lower lobbying or PAC contributions because of the disciplineimposed by debt. However, high leverage might also relate positively to politicalinvestments as greater political engagement could actually be a solution to theproblems and risks manifesting in higher leverage. Empirical results reported byCooper et al. (2010) and Faccio et al. (2006) suggest that politically engagedfirms have higher leverage. Lack of financial strength is another possible reasonfor firms to engage in political activities.

2.1.4. Firm performance

Firms experiencing poor performance might not be able to afford resources topursue political activities. Thus, one may expect a negative relation between per-formance and proclivity and intensity of political investments. However, it isplausible to argue that political engagements can be a solution to alleviate prob-lems causing poor performance. Here, poor performance is expected to relatepositively to expenses on lobbying and/or PAC contributions. It can be arguedthat firms that are underperforming view political engagement as a possible solu-tion to their underperformance. Supporting this possibility, Cooper et al.’s(2010) results indicate that on average, contributing firms have lower returnsover the previous three-year period, higher book-to-market, lower cash flow,and higher leverage compared to noncontributors. Cooper et al. (2010: 12) ratio-nalize their findings as suggesting that ‘… If there are in fact extra costs (above



and beyond the nominal costs of hard money contributions) to participatingeffectively in the contribution process, then it appears that the high-contributingfirms, with their much larger firm size, may be more able to incur these expensesthan the low-contributing firms. In addition, because of their recent poor stockprice and earnings performance, PAC firms, relative to their noncontributingsize-matched peers, may have a greater incentive to establish political connec-tions that can help increase firm performance.’ Myers (2007) reports that firmswith lower previous profitability are more likely to establish PACs in hopes ofimproving their performance. Finally, Chen et al. (2010) show that firmsincrease their lobbying outlays following poor performance and realize betterfuture performance over and above the mean reversion related performancerebound.

2.1.5. Growth opportunities

It is plausible to argue that firms with greater future growth opportunities aremore likely to engage politically. Growth opportunities not only serve as a proxyfor potential to grow but also capture the uncertainty associated with growth. Inboth dimensions, higher growth opportunities will influence a firm’s politicalstrategies. First, to realize growth potential, firms might need political allies.Additionally, to hedge themselves against possible uncertainties and potentialcompetition in growth sectors, firms can choose to actively solicit political con-nections. Myers (2007) reports that firms with high capital expenditure are morelikely to be politically engaged. This might be reflective of political engagementbecause of a firm’s need to capture future growth opportunities. Researchers(Singh et al. 2009) also utilize the ratio of research and development (R&D)expenditures to sales to capture uncertainties associated with the technology-intensive nature of a firm’s business. They report a positive link between R&Dintensity and the degree of a firm’s political engagement.

2.1.6. Industry effects

Industry economic and regulatory dynamics are expected to influence a firm’slobbying behaviour. For instance, Schuler et al. (2002) report that political activ-ity at the industry level positively associates with that at the firm level, and firmsin more concentrated industries show greater likelihood of being politicallyengaged. Similarly, Andres (1985) and Masters and Keim (1985) suggest thatfirm participation rates in the political process are conditioned by industry char-acteristics. With respect to the impact of industry level political activities on cor-porate performance, Shon’s (2006) evidence on industry level donations indicatesthat industry groups that donated more to Republicans experienced positiveabnormal returns after the 2000 presidential elections. Similarly, analysing stockreturns around the 2000 presidential election, Knight (2006) shows that currentstock prices capture future policy and legislative effects on corporate value.



His evidence suggests that industries expected to fare better under the republicanpresident will tend to donate more to campaigns.

2.2. Firm as a ‘Nexus of Contracts’

In the agency theoretic framework, corporate political activities can be reflec-tive of managerial agency conflict. In the rational value maximizing perspectiveof a firm, management faithfully pursues shareholder wealth maximization.There is no conflict of interest between management (agents) and shareholders(principals). However, given the lack of transparency, weak corporate democ-racy, and divergence between management and shareholder objectives, manage-rial political engagements may be the cause of concern for investors. Two mainreasons for this concern come to mind. First, in the real world, characterized asit is by performance-linked compensation plans and information asymmetries,management might be motivated to undertake political activities that boost shortrun performance – and hence their payoff – at the cost of long-term value crea-tion for shareholders. The second reason for the concern is that in the pursuit ofpersonal interests – political connections and positions, promoting, for example,political ideologies and preference – management can use political investments ina wasteful manner, yielding neither short-term nor long-term value gains.Skeptics of corporate political-contributions-as-value-maximizing-investments

argue that if investment in political engagements is an efficient and productiveusage of resources, why do we not see more firms engaged in lobbying and at alarger scale than observed? Ansolabehere et al. (2003) observe that given thelevel of impact that public policy and government contracts can have on busi-nesses, there seems to be too little investment in developing political connections.To rationalize the phenomenon of too few dollars chasing politicians, Ansolabe-here et al. (2003: 105) offer a different perspective, ‘… that campaign contribu-tions should be viewed primarily as a type of consumption good, rather than asa market for buying political benefits.’ The logical question that arises in this per-spective is Whose consumption preferences do the political expenses represent,shareholders’ or their agents’? Per the Federal Election Campaign Act of 1974(FECA), organizations may not contribute money to political campaigns directlysourcing it from the corporate treasury. Lobbying, however, is a corporateexpenditure and comes out of the corporate treasury controlled by management.According to Jensen (1986), managers with access to free cash flow might

engage in wasteful spending. Extending the political-contributions-as-consump-tion perspective to lobbying, agency theorists argue that management mayengage in lobbying as wasteful consumption financed by shareholders’ money.Thus, skeptics view lobbying expenses as satisfying managerial personal prefer-ences and perquisite consumption motives. There are several possible scenariosfor value consequences. The first possibility is that lobbying is value destroyingas it misallocates resources away from potentially productive usage. How-ever, given that lobbying outlays are relatively small, the direct negative value



consequences of lobbying – even if it is wasteful – could be economically insignif-icant. The second possibility is that lobbying might be value enhancing as well aspromoting the personal interests of management. That is, lobbying may well beconsistent with management-shareholders interest alignment.The indirect value consequence could be of greater significance. Agency-driven

managers might lobby for promoting legislative and administrative policies thatcreate a power balance that is favourable to management relative to share-holders. There exists significant evidence suggesting a negative relation betweenmanagement entrenchment and corporate value. Gompers et al. (2003) provideevidence that the greater is the managerial power relative to shareholders, thepoorer is corporate value performance. Bebchuk et al. (2004) and Bebchuk andCohen (2005) provide complementary evidence. In addition, management mightalso be instrumental in promoting legislation that dilutes disclosure requirementsand hence market monitoring, thereby creating opportunities and incentives fortheir self-serving behaviour at the cost of shareholders. A case in point is thecorporate resistance to passage of the Sarbanes Oxley Act in 2000.Corporate executives might view political connections as instruments for

boosting their career progression. Additionally, nurturing political connectionsto get into socio-political spotlights may be a major attraction for several corpo-rate executives. That pursuit and the resulting distraction might result in loss ofcorporate shareholders value. Malmendier and Tate (2007) suggest that ‘super-star’ CEOs lose focus in running their firms and their firms underperform interms of accounting and market performance. Thus, political engagements moti-vated by personal interests might be manifestation of agency problems. Hart(2010: 177) suggest ‘‘… the goals of those involved may include fame (as in thecase of ‘Davos man’), election to public office (‘Potomac fever’), enactment ofpolicies of personal interest, and personal wealth, in addition to improving thecollective fortunes embodied by the firm.’’ Myers (2007) provides limited evi-dence linking managerial distraction to corporate political activity as well as ofmanagerial hubris partly explaining firm level PAC activity.The evidence that political activities might be agency driven is not conclusive

however. Farrell et al. (2001) analyse determinants of the political contributionsmade by top management to their firm’s PACs. They report that PAC contribu-tions are positively related to executive shareholdings and option holdings. Theyinterpret their findings as evidence that political engagements align managerialand shareholding interests. Similarly, Gordon et al. (2007) provide evidence of arobust relation between corporate contributions and pay for performance sensi-tivity. Their interpretation of their findings is that political engagements reflect abetter alignment of corporate and management interests. Cooper et al. (2010)interpret their findings of a positive relation between firm performance and polit-ical contributions as consistent with the value maximizing rational view of thefirm rather than the agency theoretic explanation of corporate political activities.They argue that treating money in politics as too little (Ansolabehere et al.,2003) and based on that, concluding that political contributions are consumption



preferences, is misleading. Cooper et al. (2010: 23) suggest that ‘… to the extentthat the costs of successfully participating in the political contribution processare higher than the nominal costs of PAC contributions, and to the extent thatfirms receive real economic benefits from their participation, our results areconsistent with the idea that firms participate in the political system not from thestandpoint of consuming a patriotic consumption good, as discussed inAnsolabehere et al. (2003), but rather from the standpoint of creating positivenet present value investments.’

3. Modes of political participation

Traditionally, two main known channels through which firms establish politi-cal connections are identified as a) contributions to political offices throughPACs and b) corporate lobbying. Recently, there is an emerging body of litera-ture, especially in the corporate governance area that emphasizes the importanceof political connectedness of businesses in terms of formal and informalnetworks including board memberships by politicians and executives joiningpolitics. In addition, firms can also participate in the political process throughmembership in trade associations and industry organizations.Our focus is on political activities of a firm as an individual entity. We focus

on the literature dealing with the corporate decision to form a PAC, decision tolobby and decision to establish an organizational link with politicians.The main distinction between political participation through PAC contribu-

tions and through lobbying lies in terms of decision point and the source offunds. PAC contributions are individual employee decisions that are voluntaryin nature and management does not have direct control over the individual con-tributions made to PAC funds. Lobbying expenses, in contrast, are accountedfor and appropriately reported expenses that are incurred at managerial discre-tion. Per the Federal Election Campaign Act of 1974 (FECA), organizationsmay not contribute money to political campaigns directly sourcing it from thecorporate treasury. Lobbying, however, is a corporate expenditure and comesout of the corporate treasury controlled by management.Although extant literature in political science and economics suggests that

businesses value political connections and lobbying engagements are a significantpart of corporate nonmarket strategies, most of the research on political engage-ments of businesses focuses on corporate campaign contributions through PACs.Brasher and Lowery (2006) suggest that despite extensive research on corporatepolitical activity, clear and consistent conclusions remain elusive becauseresearchers have focused on PAC contributions rather than on lobbyingactivities and have just studied a narrow set of large firms. Brasher and Lowery(2006: 1) opine, ‘… unfortunately, the literature does not provide very clearand consistent answers about why some organizations lobby and other donot ... [and] ... the literature on lobbying impact has generated an equally confus-ing and inconsistent set of empirical results.’



Existing research points out that lobbying is a more important – volume andeffectiveness – channel to influence political decisions impacting businesses. Forinstance, while Milyo et al. (2000) provide evidence that firms spend significantlymore on lobbying activities than on PAC or soft money contributions, Brasherand Lowery (2006) report that the number of active PACs is relatively quitesmall compared to the number of lobbying entities. Finally, Chen et al. (2010:10) report that ‘… If we compare the average firm’s political spending across thethree categories (by aggregating lobbying expenses per year into amounts perelection cycle to match the reported PAC and soft money) in the 1998 electioncycle, for instance, we see that lobbying is around 22 times greater than PACcontributions, and around 20 times greater than soft-money contributions.’ Simi-larly, Bombardini and Trebbi (2008) report that for 2006, interest group lobby-ing expenditures at $2.59 billion far outweighed the $345 million in campaigncontributions.More recent evidence (see for example, Myers, 2005) suggests that lobbying

and PAC contributions are complementary modes in augmenting a firm’s accessto political power corridors. Humphries (1991) also provides evidence of a strongcorrelation between lobbying intensity and PAC contributions. Echoing similarsentiment, Hojnacki and Kimball (2001) suggest that while just having a PACmay not increase the level of political access available to a firm, having a net-work that forms PACs provides support that can result in increased accessthrough other political activities including lobbying.There are an increasing number of researchers focusing on networking and the

resource boundary-expanding role of corporate management teams in compli-menting PAC and lobbying efforts of corporate entities. Goldman et al. (2009)investigate the extent to which political connectedness exists in US firms and towhat consequence. Defining political connectedness in terms of former politi-cians serving on corporate boards, they investigate two types of scenarios. In thefirst set of tests, they assess the value impact of the 2000 presidential elections.They report that in the postelection period, firms with boards classified asRepublican significantly outperformed the portfolio of firms classified as havinga Democrat board. In addition, the evidence indicates that the Republican port-folio exhibited a positive and significant cumulative abnormal return (CAR) fol-lowing the election. At the same time, following the election, the Democratportfolio exhibited a negative CAR.In the second set of tests, they report that firms that nominate politically con-

nected individuals to their boards experience significantly positive abnormalstock returns following the nomination announcement. Goldman et al. (2009:2333) interpret their findings as, ‘‘… First, a company’s value goes up in antici-pation of future benefits following the nomination of politically connected indi-viduals. Second, when the director’s political party gains control of thepresidency, the value generated by her increases while the value generated by adirector connected to the opposing party decreases.’’ Agrawal and Knoeber(2001) provide further evidence that firms adjust their board composition in their



effort to build political connections. They point to a greater tendency to nomi-nate a board member with a political background in firms that are involved ingovernment business or otherwise function in intensely competitive markets.In non-US settings, Fisman (2001) provides evidence that political connec-

tions are valuable in developing countries. Studying Indonesian firms, Fisman(2001) provides evidence indicating that firms connected with President Suhartoexperienced value loss at the time of the negative news about Suharto’s health.In a broader international setting, Faccio (2006) reports positive value relevanceof political connections defined in terms of controlling shareholders or top man-agers being in political positions. Her evidence suggests that politically con-nected firms experience lower tax burdens and have easy access to capital.Goldman et al. (2009) report that board connectedness is a better predictor ofpolitical engagements than PAC contributions. Finally, Myers (2007) suggeststhat PAC contributions are less informative in studying the political strategiesof corporate entities. His argument (Myers, 2007: 10) revolves around PACcontributions being relatively small compared to other modes of political partic-ipation, ‘… corporate PAC donations are small relative to politicians campaignbudgets, and corporate PACs do not donate the marginal political dollar inclose or expensive elections. There is little empirical evidence that campaigndonations affect the behaviour of political roll call votes. And finally, corporatePAC activity is a small portion of overall corporate political activity. Theseconsiderations call into question the appropriateness of using PAC data tomake inferences about the relationships that exist between politicians andfirms.’

4. Value relevance of corporate political engagements

There are several approaches researchers have taken to the assess value conse-quences of corporate political engagements. From the accounting and financeperspective, the most direct way to measure the value impact of political activi-ties is to relate them to financial markets and accounting performance. Severalstudies relate the decision to establish PACs and the level of PAC contributionsto stock returns and operating performance. Recently, there is an emerging focuson lobbying where researchers [see for example, de Figueiredo and Tiller (2001),Brasher and Lowery (2006), and Chen et al. (2010)] relate the decision to lobbyand the degree of lobbying (proxied by lobbying expenses and number of lobby-ists hired) to various measures of corporate performance. Another trend emerg-ing in the recent finance literature is to assess the performance impact of politicalengagements in terms of political connections of corporate boards and manage-ment teams. Both traditional multiple regression and event study approacheshave been employed to study market value consequences of engaging politicallythrough the hiring of politically connected board or management team members.Some studies have also analysed events like the disruption of political connectionbecause of the sudden death of a corporate political ally. In other fields,



researchers have investigated the linkage between political engagements and therealization of beneficial policy outcomes or avoidance of unfavourable policydecisions.

4.1. Financial performance

Stigler’s (1971) work serves as the theoretical foundation for relating a firm’sperformance to its political engagements. Governments, in their role as regula-tor, policy makers, as well as business clients, have influence on corporate perfor-mance. In this perspective, corporate political activities are motivated bysecuring favourable policy outcomes, tax and subsidy benefits, and governmentcontracts.

4.2. Stock returns

Studying the stock return performance impact of approximately 819,000 PACcontributions made by 1930 firms between 1979 and 2004, Cooper et al. (2010)report that a portfolio of firms weighted by the number of supported candidateshas a statistically significant higher monthly return of 21 basis points (or about2.4 per cent per year). To rule out the possibility of spurious correlation drivingtheir results and to establish that it is the greater degree of political engagementthat contributes to better firm performance, the authors report that consistentwith causation, contributions are correlated with an improvement in future per-formance. The results also suggest that the performance impact in terms of thenumber of supported candidates is economically meaningful in that a one-stan-dard deviation increase in the number of supported candidates leads to about a2.6 per cent annual higher abnormal return.Myers (2005) provides additional evidence that ‘… in some industries the risk-

adjusted performance differential between firms with PACs and those withoutcan be as large as 6 per cent per year. In the case of firms with PACs, the quintileof firms that spend the least outperforms the quintile of firms that spends themost by upwards of 10 per cent per year.’ Interestingly, the findings suggest thatwithin firms that have a PAC established, those that contribute relatively greateramounts, underperform those that contribute less. Evidence provided by Myers(2005: 3) also indicates that ‘…the political process creates nontrivial systematicrisk that affects asset pricing, that this risk is understood and considered byinvestors and is priced…’. Chen et al. (2010) analyse the impact of political activ-ities in terms of lobbying on market performance using a portfolio approach.Their results also indicate that portfolios of firms with the highest lobbyingintensities significantly outperform their benchmarks portfolios. Chen et al.(2010: 25) report ‘… firms with the highest lobbying intensities outperform theirbenchmarks of nonlobbying firms … also show that increases in lobbying tendto follow poor performance … [F]irms with the highest lobbying intensityoutperform other firms …’.



4.3. Operating performance

Politically connected firms realize gains in terms of better operating perfor-mance as well. Evidence provided by Faccio and Parsley (2009) suggests thatpolitically connected firms suffer a decline in sales growth at the time of the dis-ruption in the connection. Chen et al. (2010) also report that on average, lobby-ing is positively related to accounting measures of financial performance. Theirresults are robust to variations in empirical model specifications and perfor-mance measures and hold after controlling for potential sample selection bias.As noted earlier, Cooper et al. (2010) provide similar evidence on the positiveimpact of PAC contributions on firm operating performance measured in termsof return on equity. Alexander et al. (2009) study return on corporate lobbyinginvestments in the context of the American Jobs Creation Act of 2004. Theirestimates (Alexander et al., 2009: 1) indicate that ‘… firms lobbying for thisprovision have a return in excess of $220 for every $1 spent on lobbying, or22,000 per cent.’The evidence suggesting a favourable value consequence of political engage-

ments is not only limited to the United States. Studying over twenty thousandfirms in forty-seven countries, Faccio (2006) concludes that firms, on average,experience about a two per cent increase in shareholder wealth at the time ofthe announcement of their executive or large shareholder joining politics.Oberholzer-Gee and Luez (2006) also provide evidence from Indonesia on valuerelevance of political connections. Their findings suggest that political connec-tions are value relevant as they facilitate domestic capital raising on relativelyfavourable terms for politically engaged firms compared to nonconnected firms.Their evidence indicates that those connected firms that experience a reductionin patronage with political regime changes experience performance deteriorationand initiate seeking funding abroad.These findings are in line with the evidence reported by Jayachandran (2006)

wherein an unanticipated change in political party affiliation by a politician maylead to a market value loss for firms making PAC contributions to the party leftby the politician. Political connections can also be valuable in terms of directgovernment support at the time of distress. For instance, Faccio et al. (2006)provide evidence that politically connected firms are more likely to be bailed outby the government. Similarly, Claessens et al. (2008) find evidence supporting apositive link between campaign contributions and stock returns for Brazilianfirms.Further, the positive impact of political activities is also observed in the

nonprofit arena as well. For instance, de Figueiredo and Silverman (2006) studylobbying by universities seeking educational funding. They report that univer-sities lobbying with Senate Appropriations Committees can generate returnsthat are 10 to 15 times of their lobbying dollar investments. They also report ahigher return for universities that have representation on house appropriationcommittees.



Myers (2009) provides evidence that the corporate capital structure is influ-enced by political connections of firms. Myers argues that while politicians mayimpose costs on firms to realize political benefits, they also want to make surethat those costs do not lead to firms going bankrupt. Myers argues that firmsfacing hostile politicians optimally increase their leverage to discourage politi-cians from imposing costs on them. Myers (2009: 1) suggests that ‘‘Since theprobability of financial distress increases with leverage, firms optimally increasetheir debt to discourage the cost impositions from ‘hostile’ politicians. Similarly,in the presence of ‘friendly’ politicians, firms optimally lower their debt levels’’.Using US data, Myers reports that large firms reduce their leverage to the orderof 3 per cent when friendly politicians chair their relevant industry senate com-mittees. The resulting reduction in the cost of bankruptcy and risks associatedwith high leverage are expected to impact corporate value positively. Richteret al. (2008) provide evidence on lobbying consequent tax saving benefits. Study-ing a large set of US firms Ritcher et al. report, ‘…on average we expect firmswith 1 per cent higher lobbying expenditures to realize a 0.5 to 1.6 per cent pointlower effective tax rate.’

4.4. Impact in terms of policy influence

Research on the impact of lobbying and PAC contributions on public policyoutcomes suggests that specific policy outcomes are influenced by politicalengagements (see, for example, Ramirez and Eigen-Zucchi, 2001 for the ClaytonAct of 1914, Ramirez and de Long, 2001 for the Glass-Steagal Act of 1993, andRehbein and Lenway, 1994 for trade policy issues). Specific to lobbying, Lord(2000) reports that the congressional staff perceived professional lobbying as themost effective way to influence congressional legislative policy provisions. Withrespect to the influence of public policy on firm performance, while Banker et al.(1997) study airline carriers, Bowman et al. (2000) look at pharmaceutical firms.Given that both of the studies report that expected policy changes impact marketvalue, it is plausible to argue that lobbying and PAC activities aimed at swayingpolicy outcomes influence firm value. Lo’s (2003) analysis of the 1992 revision ofexecutive compensation disclosure rules suggests that firms who lobbied againstthe proposed regulation experienced positive abnormal stock returns of aboutsix per cent.Within the political economy framework, trade policy models (Magee et al.

(1989) and Grossman and Helpman (1994)) posit that corporate entities makecampaign contributors with an aim to maximize value added from those con-tributions. Liebman and Reynolds (2009) analyse the impact of campaigncontributions made by the corporate beneficiaries and Congressional sponsorsof Byrd Amendment. They report that campaign contributions from beneficia-ries increased the likelihood of lawmakers sponsoring the law. In addition,contributions from the law’s beneficiaries and the expected rents from the pas-sage of the law were positively related. Evans and Sherlund (2006) examine



whether and in what ways lobbying impacts antidumping case outcomes.Building on empirical framework of Grossman and Helpman (1994), theyprovide evidence that antidumping duty rates tend to be higher – therebyaffording greater protection – for politically active petitioners compared tononpetitioners.Studying the Stock Option Accounting Reform Act of 2004 (the Act), Farber

et al. (2007) report that House members who supported the Act were more likelyto have received larger PAC contributions. In addition, the evidence suggeststhat the greater the anticipated benefit of the act, the greater the contributionsmade by the firms to the House and Committee members.More recently, in the context of the Sarbanes-Oxley Act, Hochberg et al.

(2007) report that firms that lobbied against the passage of ‘Enhanced Disclo-sure,’ ‘Corporate Responsibility’ and ‘Auditor Independence’ provisions experi-enced greater cumulative returns relative to the nonlobbying firms within thefour-and-a-half month window preceding the passage of the Act. Focusing onindustry-specific issues, de Figueiredo and Edwards (2007) report that there is asignificant effect of private money on regulatory policy outcomes in the telecom-munication industry.Still, lack of systematic and conclusive evidence of an effect of contributions

on policy outcomes (Chamon and Kaplan, 2007) has resulted in some research-ers (Milyo et al., 2000 and Ansolabehere et al., 2003) concluding that politicalinvestments are insignificant compared to the potential returns (incorrectly)attributed to them as they are perceived to be inconsequential in generatingvalue. Ansolabehere et al. (2003) study of interest group contributions suggeststhat contributions are generally ineffective in favourably influencing voting out-comes.There is some emerging evidence that suggests that political engagements

might not be value relevant or that they can actually have a negative impact oncorporate performance and value. For instance, Goldman et al. (2009) reportthat while political connections in terms of politicians’ representation on corpo-rate boards do add value, political contributions do not seem to influence indus-try-adjusted performance. Similarly, findings reported by Aggarwal et al. (2007)suggest that PAC contributions are agency driven and negatively influence futurestock performance. They interpret their finding as providing only limited sup-port for the hypothesis that political donations represent investment to createvalue. In addition, management might promote their interests by committingcorporate and accounting fraud and taking shelter against detection by engagingin lobbying. Yu and Yu (2010) report an interesting positive link between lobby-ing and corporate fraud. Utilizing data on corporate lobbying outlays between1998 and 2004, they report that ‘… firms’ lobbying activities make a significantdifference in fraud detection: compared to nonlobbying firms, firms thatlobby on average have a significantly lower hazard rate of being detectedfor fraud … are 38 per cent less likely to be detected by regulators. Inaddition, fraudulent firms on average spend 77 per cent more on lobbying than



nonfraudulent firms and spend 29 per cent more on lobbying during their fraud-ulent periods than during nonfraudulent periods.’ Finally, Fan et al. (2007)report that Chinese firms that are politically connected have relatively inferiorcorporate performance.Skeptics also point out that there can be a conflict of interest between lobbyists

as agents and corporate management who hire them as principals. For instance,utilizing ethnographic methods to study lobbyists and government affairs man-agers, Kersh (2002) concludes that the agents, at times, pursued their ownagenda contradictory to the goals of corporate entities employing them, thereby,destroying rather than creating value.

5. Corporate governance and value impact of firm political activities

Finally, we provide empirical evidence on corporate political activities – interms of lobbying – as influenced by shareholders’ rights and relate them interac-tively to corporate value creation in an integrative unified framework.

5.1. Data and sample selection

Our annual corporate lobbying data come from the database compiled by theCenter for Responsive Politics (CRP, 2008). The sample lobbying data cover the5-year period from 1998 to 2003. The choice of the time frame is dictated by dataavailability as the first year CRP lobbying data is available is 1998.For analysing shareholder rights as they impact decision to lobby and the

degree of lobbying intensity, and interactively influence firm performance, westudy governance and performance variables back 2 years to 1996. With an aimto study a relatively homogenous set of US firms, we focus on the Stern Stewartannual list of best performing firms. We start with the 1000 firms placed on SternStewart’s 2003 best performing firms list and trace these firms back for 7 yearsto 1996. We restrict our sample to nonfinancial firms.To measure the quality of corporate governance, we focus on the degree of

shareholder rights. As a proxy for shareholder rights, we utilize the GovernanceIndex developed by Gompers et al. (2003) (GIM) and the Entrenchment Indexdeveloped by Bebchuk et al. (2004). To construct these indices, we obtain infor-mation on governance provisions from the Investor Responsibility ResearchCenter (IRRC) database for 1995, 1998, and 2000, and 2002. Gompers, et al.report that at the firm level the Governance Index is relatively stable. To create acontinuous series of the governance index spanning the sample period of 1996 to2003, we follow the commonly accepted practice of extrapolating the lastavailable year’s observations on governance provisions until the new data areavailable.We utilize COMPUSTAT database to gather accounting data on control

variables. Combining the Stern Stewart, IRRC, CRP, and COMPUSTAT data-bases, our final sample consists of 5452 firm-year observations.



5.2. Measurement and description of variables

5.2.1. Shareholder rights

In their construct, GIM utilize the IRRC data on a variety of governanceprovisions that restrict takeovers. The IRRC reports twenty-two charter take-over defence provisions, bylaw provisions, and other firm-level rules as well assix state takeover laws. GIM focus on twenty-four unique provisions to arrive attheir governance index. The Governance Index calculation involves summingindividual provisions that restrict shareholder rights by protecting managersagainst takeover threats. The interpretation of the governance index is straight-forward: the higher the index, the greater is the managerial power and weakerare the shareholder rights. Thus, the index is reflective of the balance of powerbetween management and shareholders. We also utilize the Bebchuk et al. (2004)Entrenchment Index as an alternative proxy for management entrenchment.Reflective of shareholder rights, the Bebchuk et al. (2004) index has an interpre-tation similar to the GIM index.

5.2.2. Lobbying intensity

We consider aggregate parent company level annual lobbying expensesreported by firms as a measure of their lobbying intensity. This measure consid-ers lobbying expenditures undertaken in-house as well as through contracted lob-byist firms. To eliminate any possibility of reverse causality, we utilize dependentlobbying variables with a lag.

5.2.3. Corporate Performance

We utilize two distinct, but related, measures of corporate value creation. Thefirst measure is Stern Stewart’s economic value added (EVA). We also utilizeStern Stewart’s market value added (MVA) metric to assess the long-term valueimpact of lobbying engagements.We utilize the following control variables.Firm size: To control for the multidimensional influence of firm size, we utilize

the natural log of the book value of total assets as a proxy for firm size.Leverage: We utilize the ratio of total debt to total assets as a measure of

leverage.Firm performance: We use return on assets as a proxy for corporate

performance.Growth opportunities: In our models, we use the market to book ratio as a

proxy for growth opportunities facing a firm.Capital expenditure: We also control for revenue adjusted capital expen-

ditures to clearly delineate the impact of resource constraints on lobbyingintensity.



Industry effects: To clearly delineate the influence of a firm’s governance char-acteristics on its lobbying strategy and its value consequences, we use one-digitSIC code industry dummies to control for industry effects.

5.2.4. Sample statistics

Table 1 provides the sample descriptive statistics. Our final sample consists of5452 firm-year observations. The sample firms represent 1000 best performingfirms in terms of economic value added per the Stern Stewart rankings. The aver-age MVA is $7781.3m with a large standard deviation. The median MVA for thesample period is $1669.9m. Corresponding EVA numbers are at $20.3m and$25.6m. As expected, the spread between the return on invested capital and costof capital is positive. The mean governance index and entrenchment index levelsat 9.37 and 2.12 are comparable to those reported in the literature on shareholderrights. The sample firms show a large variance in firm size measured in terms ofmarket value, revenue, assets or income. The sample firms, on average, spend$0.54m on lobbying and hire 1.93 lobbyists. Excluding nonlobbying firms, we findthat for the subsample of lobbying firms only, the mean (median) annual lobbyingexpense is $1.15m ($0.4m) while the number of lobbyists engaged is 4.06 (2.00).

5.2.5. Comparison of lobbying and nonlobbying firm characteristics

The results displayed in Table 2 suggest that lobbying firms are significantlymore value generating – in terms of both the market value added and economic

Table 1

Sample descriptive statistics

Mean Median SD

Market value added ($ million) 7781.33 1669.94 27521.88

Cost of capital (in per cent) 8.15 7.85 1.94

Economic value added ($ million) 20.33 24.59 939.89

Return on invested capital 12.39 8.57 117.74

Governance index (Gompers et al., 2003) 9.37 9.00 2.76

Entrenchment index (Bebchuk et al., 2004) 2.12 2.00 1.33

Total assets ($ million) 17764.32 3825.07 62777.83

Sales ($ million) 7344.68 2735.83 15903.69

Net income ($ million) 411.38 154.37 1642.91

Debt to total assets ratio 0.27 0.26 0.20

R&D to sales ratio 0.05 0.00 0.53

Return on equity (in per cent) 14.97 13.82 185.76

Return on assets (in per cent) 4.20 4.35 14.14

Market value ($ million) 17630.51 4299.92 61221.75

Lobbying expense ($ million) 0.54 0.00 1.47

Number of Lobbyists 1.93 0.00 4.67

Number of observations = 5452



value added – than nonlobbying firms. Tracing the source of value added, wefind that in terms of return on invested capital and return on assets, lobbyingfirms actually perform relatively poorly. However, they outperform nonlobbyingfirms in terms of return on equity. This is reflective of higher leverage in lobbyingfirms compared to nonlobbying firms. A significantly lower cost of capital seemsto be the major driver of considerably higher MVA in lobbying firms relative tononlobbying firms. Firm size and financial structure are often identified as criti-cal determinants of firm performance. Our data indicate that lobbying firms arelarger and have greater financial leverage.With respect to managerial entrenchment, it is clear that lobbying firms have

greater managerial entrenchment. Lobbying firms are placed higher on the Gom-pers et al. (2003) Governance Index and the Bebchuk et al. (2004) EntrenchmentIndex. An interesting conclusion from the statistics in Table 2 is that while lob-bying firms have weaker shareholder rights, they outperform nonlobbying firmsin terms of value added.

5.2.6. Lobbying intensity and management entrenchment

To quantify the extent to which managerial entrenchment influences degree oflobbying, we estimate two multiple regression models each for small and large

Table 2

Mean comparison of lobbying and nonlobbying firm characteristics

Variable

NonLobbying

Firms

Lobbying

Firms Difference p-value

Market value added ($ million) 3606.72 12374.54 8767.82* 0.00

Cost of capital (in per cent) 8.35 7.93 )0.42* 0.00

Economic value added ($ million) 12.40 29.12 16.72 0.53

Return on invested capital 14.78 9.74 )5.04** 0.09

Governance index 9.13 9.64 0.51* 0.00

Entrenchment index 2.09 2.16 0.07*** 0.05

Total assets ($ million) 7933.23 28306.98 20373.76* 0.00

Sales ($ million) 3864.12 11077.15 7213.03* 0.00

Net income ($ million) 179.62 659.92 480.30* 0.00

Debt to total assets ratio 0.24 0.29 0.05* 0.00

R&D to sales ratio 0.05 0.05 0.01 0.54

Return on equity 0.11 0.19 0.09** 0.09

Return on assets 0.04 0.04 0.00 0.90

Market value ($ million) 8636.38 27149.15 18512.78* 0.00

Lobbying expense ($ million) 0.00 1.15 1.15* 0.00

Number of Lobbyists 0.05 4.06 4.00* 0.00

*Statistically significant at the 1% level. **Statistically significant at the 10% level. ***Statistically

significant at the 5% level.



firms relating lobbying expense to two distinct measures of managerial entrench-ment (the Gompers et al., 2003 Governance Index and the Bebchuk et al., 2004Entrenchment Index). Given the previous evidence that firm size is a significantinfluence on lobbying expense, it may be informative to analyse the possibilitythat size moderates the relation between lobbying and entrenchment. To analysethis possibility, we estimate our models relating lobbying to managerial entrench-ment separately for two subsamples based on firm size. Firms with market valueabove the sample median are categorized as large firms and those with marketvalue below the sample median are categorized as small firms. We control for sev-eral firm-specific characteristics that may have a bearing on lobbying intensity.The results of our multiple regression models are presented in Table 3. In

Model 1, the test variable is the Gompers et al. (2003) Governance Index as theproxy for managerial entrenchment. The significant negative coefficient of thegovernance index variable implies that for large firms a greater degree of man-agement entrenchment associates with lower expenses on lobbying. This findingdoes not seem to support the agency explanation of corporate lobbying. Whenwe utilize the Bebchuk et al. (2004) entrenchment measure in Model 2, we findthat for large firms, this alternate measure of managerial entrenchment is alsorelated significantly negatively to lobbying intensity.

Table 3

Multivariate regression relating shareholder rights and lobbying intensity in small and large firms

Variable

Dependent variable-lobbying

expenditure

Dependent variable-lobbying

expenditure

Model-1

Large firms

(t-statistics)

Model-1

Small firms

(t-statistics)

Model-2

Large firms

(t-statistics)

Model-2

Small firms

(t-statistics)

Intercept )3.104* ()6.640) )0.667* ()6.862) )3.180* ()7.106) )0.630* ()6.529)Governance index )0.044* ()3.680) 0.006* (3.225)

Entrenchment index )0.120* ()5.117) 0.009** (2.237)

Debt to total

assets ratio

)0.714* ()3.596) 0.009 (0.297) )0.665* ()3.359) 0.006 (0.222)

Capital expenditure

to sales ratio

0.021 (0.089) )0.068* ()3.736) 0.047 (0.199) )0.069* ()3.759)

R&D to sales ratio 1.377* (6.284) 0.108* (4.070) 1.350* (6.176) 0.108* (4.067)

Return on assets 3.061* (6.169) 0.065*** (1.820) 2.911* (5.865) 0.066*** (1.860)

Log total assets 0.972* (32.619) 0.086* (11.880) 0.956* (31.816) 0.086* (11.936)

Industry controls Yes Yes Yes Yes

N 2541 2513 2541 2513

Model p-value 0.000 0.000 0.000 0.000

Adjusted R-square 0.382 0.070 0.385 0.0680

*Statistically significant at the 1% level. **Statistically significant at the 5% level. ***Statistically sig-

nificant at the 10% level.



If, as generally accepted, relatively powerful managements are more likely toengage in agency behaviour and if lobbying is considered wasteful, we shouldexpect a positive relation between entrenchment and lobbying intensity. How-ever, our tests reveal that the degree of managerial entrenchment and lobbyingintensity is negatively related. In terms of the shareholder rights-lobbying link,the interpretation is that firms with greater shareholder rights (less managerialentrenchment) engage in lobbying to a greater degree. One can argue that atfirms with greater shareholder rights, management is under greater pressure tofocus on value creation and use lobbying as one possible way to create value. Toconclude in favour of this argument, we need to relate lobbying to value crea-tion. We explore this aspect shortly.With respect to small firms, however, it appears that greater management

power (lower shareholder power) relates positively to lobbying intensity. Thisfinding holds true for both measures of managerial entrenchment. If lobbying iswasteful, this positive relation between managerial power and lobbying expensewould reflect agency conflict. In the next set of tests, we relate value creation tolobbying intensity to see if in small firms lobbying indeed is reflective of agencyconflict.With respect to control variables, we find that in the large firm subsample

firms with a greater degree of financial leverage lobby less. One possible interpre-tation is that higher leverage could act as a limiting factor on lobbying outlays.We also find that for the small firm subsample firms with greater capital require-ments lobby relatively less. The negative relation between capital expense andlobbying intensity might also be reflective of resources constraints typically facedby small firms. As expected, firms with heavy investments in R&D lobby more.Also, larger and better performing firms seem to have greater lobbying intensity.The main finding reported in Table 3 is that firm size moderates the relation

between managerial entrenchment and lobbying. While for large firms, a greaterdegree of managerial entrenchment relates negatively to lobbying intensity, therelation is positive for small firms. The results are robust to variations inthe entrenchment proxies. The findings run counter to those expected within theagency framework where large firms, with their greater availability of free cash-flows, are expected to have greater agency problems. Further research is neededto explore possible alternative explanations. For instance, it is plausible to arguethat small firms have greater information asymmetries and management canafford to engage in lobbying activities without getting adverse market reactionsor political press coverage. Another possibility is that smaller firms are at agrowth stage of their lifecycle and lobby to hedge risks and effectively tap intonewer opportunities.

5.2.7. Managerial entrenchment, lobbying, and value creation

In Table 4 we present the result of our analysis relating Managerial entrench-ment and lobbying to value creation. To ensure robustness, in the multiple



regression analysis, we utilize MVA as well as EVA as performance measures.To avoid the possibility of confounding effects of lobbying and entrenchment onMVA and EVA, we orthogonalize lobbying with respect to entrenchment. Foreach subsample, we estimate four models with various combinations of twoproxies each for value creation (MVA and EVA) and managerial entrenchment(the Gompers et al., 2003 Governance Index and the Bebchuk et al., 2004 index).We control for firm size (log of total assets) and financial leverage (ratio of debttotal assets) as well as industry effects at the one-digit SIC level.The results of this analysis are presented in Table 4. The estimated coefficients

for lobbying variables are significantly positive for all eight models estimated.Thus, lobbying positively influences value creation whether measured in MVAor EVA terms. In conjunction with the previously reported relation between

Table 4

Multivariate regression relating shareholder rights and lobbying intensity to value added in small and

large firms

Dependent variable: market

value added

Dependent variable: economic

value added

Model 1

(t-statistics)

Model 2

(t-statistics)

Model 1

(t-statistics)

Model 2

(t-statistics)

Panel A Small firms

Intercept 4.18* (4.674) 4.15* (4.883) 0.95 (0.977) 0.86 (0.915)

Log total assets 0.42* (5.966) 0.45* (6.388) 0.46* (6.264) 0.48* (6.620)

Debt to total

assets ratio

)1.79* ()5.25) )1.68* ()4.942) )0.76** ()2.010) )0.63*** ()1.682)

Governance index )0.01 ()0.377) )0.01 ()0.514)Entrenchment index )0.10*** ()1.983) )0.13** ()2.382)Lobbying expenditure 0.66* (2.912) 0.71* (3.455) 0.78* (3.407) 0.61* (3.007)


N 495 496 360 360

Model p-value 0.000 0.000 0.000 0.000


Panel B Large firms

Intercept 2.09** (2.437) 1.76** (2.251) )1.75** ()2.032) )2.02** ()2.499)Log total assets 0.79* (11.121) 0.75* (10.889) 0.68* (10.245) 0.64* (9.893)

Debt to total

assets ratio

)2.50* ()7.146) )2.32* ()6.658) )1.26* ()3.749) )1.10* ()3.306)

Governance index )0.10* ()4.293) )0.06* ()2.791)Entrenchment index )0.24* ()5.594) )0.16* ()4.110)Lobbying expenditure 0.10* (2.836) 0.12* (3.530) 0.17* (4.476) 0.21* (5.420)


N 627 625 483 482

Model p-value 0.000 0.000 0.000 0.000


*Statistically significant at the 1% level. **Statistically significant at the 5% level. *** Statistically

significant at the 10% level.



managerial entrenchment and lobbying intensity, we can interpret our results asrejecting the agency explanation of lobbying.Our results also indicate that consistent with the existing empirical evidence

provided by several studies (Gompers et al., 2003; Bebchuk et al., 2004, amongothers), there is a significant negative relation between value creation and mana-gerial entrenchment. Entrenchment proxies carry a negative significant coefficientfor six of the eight models estimated. The evidence implies that firms with weakershareholder rights perform poorly in terms of MVA and EVA. With respect tocontrol variables, we find that in general, larger firms and firms with lower finan-cial leverage perform better in term of MVA and EVA.Overall, the findings suggest that for large firms corporate lobbying might not

be agency driven and may in fact create value. For small firms, despite low share-holder rights associating with higher lobbying engagements, lobbying still con-tributes to corporate value.

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