The determinants of effective corporate lobbying

In this paper we study whether capital markets view lobbying activities to be value enhancing by examining the effects of lobbying on excess returns and stock return volatility. We undertake our analysis cautious that there are significant differences between the characteristics of lobbying and non-lobbying firms. Specifically, firm size, free cash flows, and R&D intensity are critically important factors that may drive results of our and other lobbying research. We show that once properly accounting for the effects of firm size, a managerial agency problem in lobbying is apparent. Initially we find that shareholders experience either no discernible or else negative excess returns in response to firm lobbing efforts. Results are even stronger when corrections are made for endogeneity issues. Further, evidence presented suggests that lobbying firms have higher volatility of stock returns, and we show that volatility is greater for firms that lobby more intensely. However, for R&D-intensive firms, and for those firms with low agency problems, lobbying does contribute to the long-term benefit of shareholders. Overall, results suggest that lobbying leads to positive excess returns when agency problems are low and R&D is high, and leads to negative excess returns otherwise. Copyright Springer Science+Business Media New York 2015