IDEAS home Printed from https://ideas.repec.org/a/eee/corfin/v49y2018icp54-80.html
   My bibliography  Save this article

The economics of corporate lobbying

Author

Listed:
  • Cao, Zhiyan
  • Fernando, Guy D.
  • Tripathy, Arindam
  • Upadhyay, Arun

Abstract

Prior literature examines motivations and impact of corporate lobbying and presents inconclusive evidence. We examine the association of corporate lobbying with firm performance by focusing on how this relationship varies with firm characteristics. Addressing various endogeneity concerns, our analysis shows that corporate lobbying has a negative association with firm performance. We find that the negative association between corporate lobbying and firm performance is largely driven by operationally complex firms. On the other hand, firms with high growth opportunities benefit more from lobbying than low-growth firms. Lobbying seems to provide limited tangible benefits in terms of helping a firm obtain government contracts or successfully pass the congressional bills lobbied. These results suggest that agency costs dominate the strategic benefits of lobbying activities. However, there is some evidence that firms benefit when there is political alignment between the firm and the party in power.

Suggested Citation

  • Cao, Zhiyan & Fernando, Guy D. & Tripathy, Arindam & Upadhyay, Arun, 2018. "The economics of corporate lobbying," Journal of Corporate Finance, Elsevier, vol. 49(C), pages 54-80.
    • Handle: RePEc:eee:corfin:v:49:y:2018:i:c:p:54-80
    DOI: 10.1016/j.jcorpfin.2017.12.012
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0929119917304510
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jcorpfin.2017.12.012?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Brasher Holly & Lowery David, 2006. "The Corporate Context of Lobbying Activity," Business and Politics, De Gruyter, vol. 8(1), pages 1-25, April.
    2. Mill, John Stuart, 1848. "Principles of Political Economy (II): Distribution," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 2, number mill1848-2.
    3. Michael C. Jensen, 2010. "The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems," Journal of Applied Corporate Finance, Morgan Stanley, vol. 22(1), pages 43-58, January.
    4. Aggarwal, Rajesh K. & Meschke, Felix & Wang, Tracy Yue, 2012. "Corporate Political Donations: Investment or Agency?," Business and Politics, Cambridge University Press, vol. 14(1), pages 1-38, April.
    5. Holtz-Eakin, Douglas & Newey, Whitney & Rosen, Harvey S, 1988. "Estimating Vector Autoregressions with Panel Data," Econometrica, Econometric Society, vol. 56(6), pages 1371-1395, November.
    6. Hadani, Michael, 2012. "Institutional ownership monitoring and corporate political activity: Governance implications," Journal of Business Research, Elsevier, vol. 65(7), pages 944-950.
    7. repec:cup:jfinqa:v:46:y:2011:i:06:p:1865-1891_00 is not listed on IDEAS
    8. Seung-Hyun Lee & Yoon-Suk Baik, 2010. "Corporate Lobbying in Antidumping Cases: Looking into the Continued Dumping and Subsidy Offset Act," Journal of Business Ethics, Springer, vol. 96(3), pages 467-478, October.
    9. Eitan Goldman & Jörg Rocholl & Jongil So, 2009. "Do Politically Connected Boards Affect Firm Value?," Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2331-2360, June.
    10. Michael J. Cooper & Huseyin Gulen & Alexei V. Ovtchinnikov, 2010. "Corporate Political Contributions and Stock Returns," Journal of Finance, American Finance Association, vol. 65(2), pages 687-724, April.
    11. Yermack, David, 1996. "Higher market valuation of companies with a small board of directors," Journal of Financial Economics, Elsevier, vol. 40(2), pages 185-211, February.
    12. Eitan Goldman & Jörg Rocholl & Jongil So, 2013. "Politically Connected Boards of Directors and The Allocation of Procurement Contracts," Review of Finance, European Finance Association, vol. 17(5), pages 1617-1648.
    13. Joel F. Houston & Liangliang Jiang & Chen Lin & Yue Ma, 2014. "Political Connections and the Cost of Bank Loans," Journal of Accounting Research, Wiley Blackwell, vol. 52(1), pages 193-243, March.
    14. Benjamin E. Hermalin & Michael S. Weisbach, 1988. "The Determinants of Board Composition," RAND Journal of Economics, The RAND Corporation, vol. 19(4), pages 589-606, Winter.
    15. Deniz Igan & Prachi Mishra & Thierry Tressel, 2012. "A Fistful of Dollars: Lobbying and the Financial Crisis," NBER Macroeconomics Annual, University of Chicago Press, vol. 26(1), pages 195-230.
    16. Robert E. Carpenter & Bruce C. Petersen, 2002. "Capital Market Imperfections, High-Tech Investment, and New Equity Financing," Economic Journal, Royal Economic Society, vol. 112(477), pages 54-72, February.
    17. Unsal, Omer & Hassan, M. Kabir & Zirek, Duygu, 2016. "Corporate lobbying, CEO political ideology and firm performance," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 126-149.
    18. Adams, Renée B. & Ferreira, Daniel, 2009. "Women in the boardroom and their impact on governance and performance," Journal of Financial Economics, Elsevier, vol. 94(2), pages 291-309, November.
    19. Robert E. Carpenter & Bruce C. Petersen, 2002. "Is The Growth Of Small Firms Constrained By Internal Finance?," The Review of Economics and Statistics, MIT Press, vol. 84(2), pages 298-309, May.
    20. John C. Coates IV, 2012. "Corporate Politics, Governance, and Value Before and After Citizens United," Journal of Empirical Legal Studies, John Wiley & Sons, vol. 9(4), pages 657-696, December.
    21. Yu, Frank & Yu, Xiaoyun, 2011. "Corporate Lobbying and Fraud Detection," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(6), pages 1865-1891, December.
    22. Aggarwal Rajesh K. & Meschke Felix & Wang Tracy Yue, 2012. "Corporate Political Donations: Investment or Agency?," Business and Politics, De Gruyter, vol. 14(1), pages 1-40, April.
    23. Mara Faccio, 2006. "Politically Connected Firms," American Economic Review, American Economic Association, vol. 96(1), pages 369-386, March.
    24. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2008. "Boards: Does one size fit all," Journal of Financial Economics, Elsevier, vol. 87(2), pages 329-356, February.
    25. Melitz, Marc J., 2005. "When and how should infant industries be protected?," Journal of International Economics, Elsevier, vol. 66(1), pages 177-196, May.
    26. Kishore Gawande & Usree Bandyopadhyay, 2000. "Is Protection for Sale? Evidence on the Grossman-Helpman Theory of Endogenous Protection," The Review of Economics and Statistics, MIT Press, vol. 82(1), pages 139-152, February.
    27. Markussen, Peter & Svendsen, Gert Tinggaard, 2005. "Industry lobbying and the political economy of GHG trade in the European Union," Energy Policy, Elsevier, vol. 33(2), pages 245-255, January.
    28. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    29. Boone, Audra L. & Casares Field, Laura & Karpoff, Jonathan M. & Raheja, Charu G., 2007. "The determinants of corporate board size and composition: An empirical analysis," Journal of Financial Economics, Elsevier, vol. 85(1), pages 66-101, July.
    30. Mill, John Stuart, 1848. "Principles of Political Economy (III): Exchange," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 3, number mill1848-3.
    31. Linck, James S. & Netter, Jeffry M. & Yang, Tina, 2008. "The determinants of board structure," Journal of Financial Economics, Elsevier, vol. 87(2), pages 308-328, February.
    32. Brasher, Holly & Lowery, David, 2006. "The Corporate Context of Lobbying Activity," Business and Politics, Cambridge University Press, vol. 8(1), pages 1-23, April.
    33. Mill, John Stuart, 1848. "Principles of Political Economy (I): Production," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 1, number mill1848-1.
    34. Matthew D. Hill & G. Wayne Kelly & G. Brandon Lockhart & Robert A. Ness, 2013. "Determinants and Effects of Corporate Lobbying," Financial Management, Financial Management Association International, vol. 42(4), pages 931-957, December.
    35. Correia, Maria M., 2014. "Political connections and SEC enforcement," Journal of Accounting and Economics, Elsevier, vol. 57(2), pages 241-262.
    36. de Figueiredo, John M & Silverman, Brian S, 2006. "Academic Earmarks and the Returns to Lobbying," Journal of Law and Economics, University of Chicago Press, vol. 49(2), pages 597-625, October.
    37. Mill, John Stuart, 1848. "Principles of Political Economy (V): On the Influence of Government," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 5, number mill1848-5.
    38. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Benjamin M. Blau & Todd G. Griffith & Derek Larsen & Ryan J. Whitby, 2022. "Corporate lobbying and the value of firms: The case of defense firms and the 9/11 terrorist attacks," International Review of Finance, International Review of Finance Ltd., vol. 22(4), pages 759-769, December.
    2. Yali Yi & Pelin Demirel, 2023. "The impact of sustainability‐oriented dynamic capabilities on firm growth: Investigating the green supply chain management and green political capabilities," Business Strategy and the Environment, Wiley Blackwell, vol. 32(8), pages 5873-5888, December.
    3. Matthew McCarten & Ivan Diaz‐Rainey & Helen Roberts & Eric K. M. Tan, 2022. "Political connections, tacit power and corporate misconduct," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(9-10), pages 1530-1552, October.
    4. Romero, Jorge A., 2022. "Lobbying and political expenses: Complements or substitutes?," Journal of Business Research, Elsevier, vol. 149(C), pages 558-575.
    5. Woon Leong Lin, 2018. "Do Firm’s Organisational Slacks Influence the Relationship between Corporate Lobbying and Corporate Financial Performance? More Is Not Always Better," IJFS, MDPI, vol. 7(1), pages 1-23, December.
    6. Almaghrabi, Khadija S. & Tsalavoutas, Ioannis, 2022. "Political spending, related voluntary disclosure, and the cost of public debt," Journal of Financial Stability, Elsevier, vol. 63(C).
    7. Greiner, Michael & Kim, Jaemin & Cordon Thor, Jennifer, 2023. "CEO values as antecedents to corporate political activity: An empirical exploration," Journal of Business Research, Elsevier, vol. 160(C).
    8. Islam, Md Shahidul & Alam, Md Samsul & Bin Hasan, Shehub & Mollah, Sabur, 2022. "Firm-level political risk and distance-to-default," Journal of Financial Stability, Elsevier, vol. 63(C).
    9. Girard, Alexandre & Gnabo, Jean-Yves & Londoño van Rutten, Rodrigo, 2023. "Firm performance and the crowd effect in lobbying competition," Finance Research Letters, Elsevier, vol. 53(C).
    10. Woon Leong Lin, 2021. "Giving too much and paying too little? The effect of corporate social responsibility on corporate lobbying efficacy: Evidence of tax aggressiveness," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(2), pages 908-924, March.
    11. Amrita Saha & Vikrant Shirodkar & Thomas C. Lawton, 2023. "Bimodal lobbying and trade policy outcomes: Evidence from corporate political activity under uncertainty in India," Journal of International Business Policy, Palgrave Macmillan, vol. 6(1), pages 24-46, March.
    12. Shirodkar, Vikrant & Rajwani, Tazeeb & Stadler, Christian & Hautz, Julia & Mayer, Michael C.J., 2022. "Corporate Political Activity and Firm Performance: The Moderating Effects of International and Product Diversification," Journal of International Management, Elsevier, vol. 28(4).
    13. Adrian, Christofer & Garg, Mukesh & Viet Pham, Anh & Phang, Soon-Yeow & Truong, Cameron, 2022. "Policy and oversight of corporate political activities and the cost of equity capital," Journal of Contemporary Accounting and Economics, Elsevier, vol. 18(2).
    14. Greiner, Michael & Kim, Jaemin & Cordon Thor, Jennifer, 2023. "Narcissistic CEOs and their corporate political activity," Journal of Business Research, Elsevier, vol. 163(C).
    15. Fidrmuc, Jana P. & Roosenboom, Peter & Zhang, Eden Quxian, 2018. "Antitrust merger review costs and acquirer lobbying," Journal of Corporate Finance, Elsevier, vol. 51(C), pages 72-97.
    16. Goh, Lisa & Liu, Xuejiao & Tsang, Albert, 2020. "Voluntary disclosure of corporate political spending," Journal of Corporate Finance, Elsevier, vol. 61(C).
    17. Shirodkar, Vikrant & Batsakis, Georgios & Konara, Palitha & Mohr, Alexander, 2022. "Disentangling the effects of domestic corporate political activity and political connections on firms’ internationalisation: Evidence from US retail MNEs," International Business Review, Elsevier, vol. 31(1).
    18. Monomita Nandy & Suman Lodh & Jin Wang & Jaskaran Kaur, 2021. "Does lobbying of firms complement executive networks in determining executive compensation?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4137-4162, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Woon Leong Lin, 2018. "Do Firm’s Organisational Slacks Influence the Relationship between Corporate Lobbying and Corporate Financial Performance? More Is Not Always Better," IJFS, MDPI, vol. 7(1), pages 1-23, December.
    2. Adelino, Manuel & Dinc, I. Serdar, 2014. "Corporate distress and lobbying: Evidence from the Stimulus Act," Journal of Financial Economics, Elsevier, vol. 114(2), pages 256-272.
    3. Goh, Lisa & Liu, Xuejiao & Tsang, Albert, 2020. "Voluntary disclosure of corporate political spending," Journal of Corporate Finance, Elsevier, vol. 61(C).
    4. Hui Chen & David Parsley & Ya-Wen Yang, 2015. "Corporate Lobbying and Firm Performance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 42(3-4), pages 444-481, April.
    5. Unsal, Omer & Hassan, M. Kabir & Zirek, Duygu, 2016. "Corporate lobbying, CEO political ideology and firm performance," Journal of Corporate Finance, Elsevier, vol. 38(C), pages 126-149.
    6. Shirodkar, Vikrant & Rajwani, Tazeeb & Stadler, Christian & Hautz, Julia & Mayer, Michael C.J., 2022. "Corporate Political Activity and Firm Performance: The Moderating Effects of International and Product Diversification," Journal of International Management, Elsevier, vol. 28(4).
    7. D. G. DeBoskey & Yutao Li & Gerald J. Lobo & Yan Luo, 2021. "Corporate political transparency and the cost of debt," Review of Quantitative Finance and Accounting, Springer, vol. 57(1), pages 111-145, July.
    8. Franco Ernesto Rubino & Paolo Tenuta & Domenico Rocco Cambrea, 2017. "Board characteristics effects on performance in family and non-family business: a multi-theoretical approach," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 21(3), pages 623-658, September.
    9. Wintoki, M. Babajide & Linck, James S. & Netter, Jeffry M., 2012. "Endogeneity and the dynamics of internal corporate governance," Journal of Financial Economics, Elsevier, vol. 105(3), pages 581-606.
    10. Caiji Pang & Ying Wang, 2021. "Political connections, legal environments and firm performance around the world," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(3), pages 4393-4409, July.
    11. Unsal, Omer & Kabir Hassan, M. & Zirek, Duygu, 2017. "Corporate lobbying and labor relations: Evidence from employee-level litigations," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 411-441.
    12. Elvira Sojli & Wing Wah Tham, 2017. "Foreign political connections," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 48(2), pages 244-266, February.
    13. Đặng, Rey & Houanti, L’Hocine & Reddy, Krishna & Simioni, Michel, 2020. "Does board gender diversity influence firm profitability? A control function approach," Economic Modelling, Elsevier, vol. 90(C), pages 168-181.
    14. Vijaya Subrahmanyam & Manohar Singh & Anita Pennathur, 2020. "CEO characteristics, firm performance, and corporate political contributions: A firm level pre‐Citizens United analysis," Review of Financial Economics, John Wiley & Sons, vol. 38(2), pages 379-404, April.
    15. Akbar, Saeed & Kharabsheh, Buthiena & Poletti-Hughes, Jannine & Shah, Syed Zulfiqar Ali, 2017. "Board structure and corporate risk taking in the UK financial sector," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 101-110.
    16. Chen, Jun & Garel, Alexandre & Tourani-Rad, Alireza, 2019. "The value of academics: Evidence from academic independent director resignations in China," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 393-414.
    17. Mamdouh Abdulaziz Saleh Al-Faryan, 2021. "The effect of board composition and managerial pay on Saudi firm performance," Review of Quantitative Finance and Accounting, Springer, vol. 57(2), pages 693-758, August.
    18. Yik-Pui Low, Steven & Foo, Yee-Boon & Gul, Ferdinand A, 2023. "Corporate lobbying: Resource-seeking or rent-seeking? Evidence from audit fees," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(1).
    19. repec:tur:wpaper:9 is not listed on IDEAS
    20. Renee B. Adams & Benjamin E. Hermalin & Michael S. Weisbach, 2010. "The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey," Journal of Economic Literature, American Economic Association, vol. 48(1), pages 58-107, March.
    21. Chen, Tao, 2015. "Institutions, board structure, and corporate performance: Evidence from Chinese firms," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 217-237.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:corfin:v:49:y:2018:i:c:p:54-80. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jcorpfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.