S8_In Search of El Dorado

Strategic Management JournalStrat. Mgmt. J., 34: 165–181 (2013)

Published online EarlyView in Wiley Online Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2006

Received 16 March 2011; Final revision received 28 June 2012

IN SEARCH OF EL DORADO: THE ELUSIVEFINANCIAL RETURNS ON CORPORATE POLITICALINVESTMENTS

MICHAEL HADANI1* and DOUGLAS A. SCHULER2

1 College of Management, Long Island University, CW Post, Brookville, New York,U.S.A.2 Jesse H. Jones Graduate School of Business, Rice University, Houston, Texas,U.S.A.

Although many believe that companies’ political activities improve their bottom line, empiricalstudies have not consistently borne this out. We investigate the relationship between corporatepolitical activity (CPA) and financial returns on a set of 943 S&P 1500 firms between 1998 to2008. We find that firms’ political investments are negatively associated with market performanceand cumulative political investments worsen both market and accounting performance. Firmsplacing former public officials on their boards experienced inferior market performance andsimilar accounting performance than firms without such board members. We find, however,that CPA is positively associated with market performance for firms in regulated industries.Our results challenge the profit-maximizing assumptions underlying CPA research and focus onagency theory to better understand CPA. Copyright 2012 John Wiley & Sons, Ltd.

INTRODUCTION

On 21 January 2010, the United States SupremeCourt in Citizens United v. Federal Election Com-mission overturned a long-standing precedentregarding the First Amendment rights of cor-porations,1 allowing unregulated direct politicalspending by corporations in elections. The rulingreceived much publicity, with President Obamacalling it, ‘a major victory for big oil, WallStreet banks, health insurance companies and theother powerful interests that marshal their powerevery day in Washington to drown out the voicesof everyday Americans’ (Liptak, 2010; see also

Keywords: corporate political activity; regulation; agencytheory; political service; financial performance*Correspondence to: Michael Hadani, College of Management,Long Island University, CW Post720 Northern Blvd, BrookvilleNY, 11 548, U.S.A. E-mail: [email protected] Austin v. Michigan Chamber of Commerce (1990) andMcConnell v. Federal Election Commission (2003).

Coates, 2012 for a review). The view of corpora-tions meddling in politics to the downfall of thepolity is not new, as corporate political activity(CPA) has been seen since the founding of thiscountry as promoting corporate interests and agen-das over broader public interests (Epstein, 1969;Vietor, 1994). Indeed, much of modern campaignfinance law can be traced to the presidential elec-tion of 1904, when large insurance companies fun-neled sizeable sums of money to the RepublicanParty and to President Theodore Roosevelt’s cam-paign in an alleged attempt to gain legislation thatwould limit the ability of policyholders to sue man-agers for breach of fiduciary duty (Campaign LegalCenter, 2010).

Yet do corporations truly achieve their financialobjectives when they engage in CPA? The explicitassumption is that CPA helps firms to improvetheir financial bottom line, an important firm-levelgoal (Hillman and Hitt, 1999; Shaffer, Quasney,and Grimm, 2000). Theory directs us to believethat CPA may lead to profits in several ways, such

Copyright 2012 John Wiley & Sons, Ltd.

166 M. Hadani and D. A. Schuler

as by influencing public officials to enact laws orrules that alter market structure to a firm’s com-petitive advantage (Peltzman, 1976; Stigler, 1971),managing the risks emanating from the firm’sdependence upon resources from the governmentsuch as direct contracts (Blumentritt, 2003), andreinforcing social relationships between businessexecutives and public officials that maintain favor-able business conditions (Clawson, Neustadtl, andWeller, 1998). Studies show CPA leads to finan-cial success in the utilities (Bonardi, Holburn,and Vanden Bergh, 2006) and airlines sectors(Shaffer et al., 2000).

Other scholarship is more cautious about thepositive firm-level financial outcomes that can beachieved through CPA (Hersch, Netter, and Pope,2008). In their book about lobbying, Baumgart-ner and colleagues (2009) discuss the many chal-lenges that all interest groups, including busi-ness firms, face in trying to change public poli-cies from the status quo. Firms oftentimes enterthe policy debate late in the policy life cycleand are forced to defend their position ratherthan to take an offensive stance. As a result,firms may fail to achieve their desired financialreturns from their CPA. More damaging, severalrecent empirical studies find that CPA is nega-tively related to financial performance (Aggarwal,Meschke, and Wang, 2012; Coates, 2010; Faccio,2006; Igan, Mishra, and Tressel, 2009). In sum,the relationship between CPA and financial per-formance seems to be complex and incompletelyunderstood.

Our study sets forth to answer the question: whatis the relationship between CPA and firm financialperformance? Unlike other studies we: (a) considerboth corporate political investments in lobbyingand campaigns—which we call ‘corporate polit-ical investments’ (CPI)—and human capital spe-cific CPA in terms of board service by formerpublic officials, analyzed in combination, ratherthan isolation; and (b) explore the impact of shortversus long term CPA. We examine a significantslice of firms’ CPA—lobbying, campaign contri-butions, and hiring former public officials—whichmay not capture all CPA aspects, but that nonethe-less represent important and highly popular CPAapproaches (Hillman and Hitt, 1999; Hersch et al.,2008). Our results strongly suggest that CPI is notprofitable, and indeed may be detrimental to firmperformance. We find that firms’ political invest-ments are significantly and negatively related to

market valuation and firms’ cumulative politicalinvestments are likewise significantly and nega-tively related to market valuation and return onsales (ROS). Furthermore, firms that hire politi-cally tied directors also suffer in terms of mar-ket valuation. We also find that firms’ politicalinvestments and hiring of former public officials tofirms’ boards have no significant positive impacton firms’ ROS. We find one exception to this pat-tern: firms from regulated sectors realize a positiveassociation between cumulative political invest-ments and market valuation, although there was nosignificant relationship with accounting measuresof performance. This has important implicationsfor the internal organization of CPA, a topic thatis largely overlooked in the strategic managementliterature.

Our findings challenge much of the existingolder (Masters and Keim, 1985; Olson, 1965) andnewer scholarship (Cooper, Gulen, and Ovtch-nikov, 2010) regarding why firms engage in CPA.First, we show that CPA may not markedlyimprove firm financial performance, unlike studiesthat have shown positive impacts (Shaffer et al.,2000). On the contrary, we find that CPA mayactually harm some aspects of financial perfor-mance. Here we join the few studies that high-light how CPA might signal agency problems, adynamic largely ignored in contemporary manage-ment research on CPA. Our results raise ques-tions about the impetus for CPA, suggesting thatpersonal managerial imperatives and biases, andnot just firm-level profit-maximizing goals, drivecorporate political behavior (Arlen and Weiss,1995; Coates, 2012; Igan et al., 2009). We alsoshow that the hiring of former politicians tothe board may not be an effective way to bol-ster performance, which questions firms’ possi-ble usage of such directors (Hillman, Zardkoohi,and Bierman, 1999). Lastly, the findings reiteratethe ability of firms to neutralize regulation, echo-ing recent findings (McKay and Webb-Yackee,2007).

Our article proceeds as follows. The next sectionreviews the literature that speaks to the relation-ship between CPA and financial performance. Inthe third section we describe our data, measures,and methods, and in the fourth section we provideour results. Next, we discuss the results, consid-ering agency theory’s insights. Finally, we con-clude with limitations and suggestions for futureresearch.

Copyright 2012 John Wiley & Sons, Ltd. Strat. Mgmt. J., 34: 165–181 (2013)DOI: 10.1002/smj

Financial Returns on Corporate Political Investments 167

CPA AND FIRM FINANCIALPERFORMANCE: THEORY ANDEVIDENCE

The data about CPA and financial performance donot paint a clear picture about how the two arejoined. Empirical analysis has not convincinglysupported the view that CPA, such as through lob-bying and campaign contributions, leads to supe-rior financial performance.

The empirical studies focusing on campaigncontributions overall do not support the claim thata firm’s donations to political candidates lead toimprovements of its financial performance. Onestudy finds a positive relationship: Cooper andcolleagues (2010) report that the number of can-didates for legislative office supported by a firmthrough its political action committee (PAC) ispositively associated with its market value, butonly among the set of politically active firms. Alarger set of studies shows no significant rela-tionship between campaign spending and firmfinancial performance (Ansolabehere, Snyder, andUeda, 2004; Hersch et al., 2008; Lenway, Jacob-sen, and Goldstein, 1990). One study finds a nega-tive relationship between campaign contributionsand financial returns. Aggarwal and colleagues(2012) write that corporate contributions to itsPAC, soft money, and to 527 organizations wereassociated with decreases in a firm’s market val-uation in a sample of over 1,800 donating andnon-donating firms.

Similarly, the evidence to support the state-ment that corporate lobbying leads to profits isinconclusive. Two studies show that lobbyingcontributes positively to a firm’s financial per-formance. In their study of 198 actions takenby U.S.-based international airlines, Shaffer andcolleagues (2000) report a positive relationshipbetween media reports of collective lobbying anda firm’s net income, carrier load, and changein market share. de Figueiredo and Silverman’s(2006) account of 2,382 higher education insti-tutions states that universities that spend moneyon lobbying are able to obtain more academicearmarks from congressional appropriations com-mittees, but only when they are located in a dis-trict or state of one of those committee members.However, several other studies report that lobby-ing expenditures and/or lobbying appearances werenot statistically related to firm financial perfor-mance (Hersch et al., 2008; Lenway et al., 1990;

Lenway and Schuler, 1991). Lobbying was foundto be negatively related to financial results in twostudies (Coates, 2010; Igan et al., 2009). We lookto theory to explain these inconclusive empiri-cal results across these empirical studies. Draw-ing from the strategy, organizational theory, andpolitical science literatures, we describe theoreti-cal logics to support, first a positive, and seconda neutral relationship between CPA and financialperformance.

Positive relationship between CPA andcorporate financial performance

The dominant view from the strategy literature isthat CPA is a useful tool to improve a firm’s finan-cial performance (Bonardi, Hillman, and Keim,2005; Hillman, Keim, and Schuler, 2004). Baron(1995: 47, emphasis in original) writes that a firm’s‘nonmarket [CPA] strategy is a concerted pattern ofactions taken in the nonmarket environment to cre-ate value by improving its overall performance.’Oliver and Holzinger (2008: 496) stress ‘strate-gic political management’ as a ‘set of strategicactions that firms plan and enact for the purposeof maximizing economic returns from the politicalenvironment.’

CPA may have direct and indirect effects on afirm’s financial performance. CPA may directlylead to profitable opportunities for a firm, suchas by securing government contracts, permits tooperate, or by limiting the ability of competitorsto compete in a firm’s product-markets. CPA mayalso indirectly promote a firm’s performance byshaping the public policy environment to favorits business activities or to mitigate the effectsof harmful policies (Epstein, 1969). We outlinethree theories below that support the thesis thatCPA may improve a firm’s financial performance:(1). industrial-organization economics; (2) resourcedependence; and (3) class unity.

Industrial-organization economics recognizesthat CPA may play a role in improving indus-try profitability (Esty and Caves, 1983; Stigler,1971). Industrial-organization economics focusesupon industry profitability’s relationship to the ele-ments of market structure (Caves, 1964: 16). Theargument is that firms use CPA to convince gov-ernment officials to change public policies thatalter market structure in a manner favorable to thefirms in the industry. Rose’s (1985) study of thetrucking industry shows that carriers used CPA to



gain regulations that limited competition, result-ing in abnormally high profits for the regulatedfirms. Dean, Vryza, and Fryxell, (1998) find thatindustry-level contributions to politicians increasedbarriers to entry, protecting incumbent firms fromnew competition, for a sample of manufacturingfirms.

By contrast, at the firm-level of analysis,resource dependence theory links CPA to afirm’s profitability. Hillman and colleagues(2004: 840) explain that a firm’s dependence onthe government is oftentimes seen as a moti-vating factor for firms to manage that relation-ship through its CPA (see also Hillman and Hitt,1999; Schuler, Rehbein, and Cramer, 2002). Forexample, when firms rely substantially on gov-ernments for permits to operate, rules to limitmarket entry, or revenues from government con-tracts (Hansen and Mitchell, 2000), CPA allowssuch firms to monitor and to attempt to influ-ence policy making (Cho, Patten, and Roberts,2006; Kersh, 2002). CPA may serve to buffer thefirm from governmental threats and/or to forge abridge between the firm and public officials, bothof which contribute positively toward firm finan-cial performance (Blumentritt, 2003; Meznar andNigh, 1995).

Class unity theory (Dreiling and Darves, 2011;Useem, 1984) supports that CPA may lead toimproved firm financial performance. Class unitytheory examines the existing social relationshipsbetween business managers and public officials(Burris, 2005). Useem (1984) writes about an innercircle of business and policy elites in which com-panies provide information, campaign contribu-tions, post-office employment, and other perks inexchange, presumably, for favorable policy condi-tions to conduct business. CPA is seen to be oneof the behaviors that firms take to build and rein-force these social relationships to create a stablepolicy environment upon which to maximize finan-cial performance (Clawson et al., 1998). Based onthese three literatures, we expect CPA to benefitfirms’ bottom line.

Hypothesis 1a: Corporate political investmentsin lobbying and campaigns will be positivelyassociated with corporate financialperformance.

Neutral relationship between CPA and CFP

While the industrial-organizational economics,resource dependence, and class unity theories pointtoward a positive relationship between CPA andfinancial performance, other views suggest that apositive relationship is unlikely to exist. We exam-ine two different literatures, the political market-place theory with its emphasis on political com-petition, and the behavioral theory of the firm,which combined suggest that CPA may be partof a zero-sum political game that is difficult toevaluate accurately. The implication is that CPAwill not contribute significantly toward improvingfirm’s financial performance.

The political marketplace theory views CPA asexchanges in the policy arena occurring betweenpolicy demanders, such as firms and interestgroups, on one side, and policy suppliers, legis-lators, regulators, and their staffs, on the other(Bonardi et al., 2005). Firms compete against otherfirms and interest groups for the limited accessto these public officials (Hillman and Hitt, 1999).With many political rivals, the ability of a givenfirm to forward a given public policy agenda is dif-ficult and has a low probability of success (Baum-gartner et al., 2009; Gray and Lowery, 1997; Halland Wayman, 1990).

The competition between firms for politicalaccess may result in a perverse set of incentivesfor a given firm to engage in CPA. Some schol-ars have noted that game theory dynamics can beapplied to the strategic context of CPA (Colman,1982; Kleindl, 1999). While a given firm may ben-efit from lobbying a public official to whom it hasaccess for a collective benefit (such as an industry-wide subsidy), since the competition to meet withthat official is fierce, the firm may use its limitedtime with the public official to instead ask for anarrow, ‘particularlistic’ policy that benefits itselfover rivals (Olson, 1965). Other firms are likely tofollow a similar logic, because if they do not par-ticipate, the particularistic policy of the other firmmay be advanced unchecked. In the end, firms havestrong incentives to act opportunistically ratherthan to cooperate (Colman, 1982; Kleindl, 1999),leading to a situation where one firm’s CPA effec-tively cancels another firm’s CPA. Ultimately, thisresults in an ‘arms race’ with politically activefirms exerting high efforts for unclear public policyoutcomes (Gray and Lowery, 1997). Such zero-sum dynamics have been reported across a variety



of policy areas, including antidumping (Lee andBaik, 2010), financial service legislation (Strat-mann, 2002), and airline legislation (Godwin andSeldon, 2002).

The race by policy demanders to try to get theirvoices heard also affects the willingness of pol-icy suppliers to respond to these demands (Smith,2000). Studies have shown that when policy mak-ers perceive a large crowd vying for access orhigh levels of conflict among policy demanders,they tend to rely more strongly on personal ideol-ogy, party ideology, and the preferences of theirconstituency, and less so on lobbying attemptsby individual firms and interest groups (Kollman,1998; Smith, 2000). It is generally only whenpolicy makers deal with a few policy deman-ders over time that they are likely to take accessseekers’ input into account (Bonardi et al., 2005).In situations with many policy demanders, espe-cially when these demanders advocate for a varietyof policy preferences, the policy maker is unlikelyto respond favorably to any one request. Indeed, intheir empirical analysis of political influence acrossa large set of business and other interests, Baum-gartner and his team report that PAC spending andlobbying are not correlated with public policy vic-tories (2009: 202–204), and conclude, ‘[w]e findvirtually no linkage between resources and [policy]outcomes’ (204).

The behavioral theory of the firm represents asecond theoretical basis to suggest a neutral (zero)relationship between CPA and firm financial per-formance. It assumes that managers have cogni-tive limitations, biases related to organizationaltraditions or structures, and operate within orga-nizations that imperfectly scan, screen, and pro-cess external information (Allison, 1971; Cyert andMarch, 1963; March, 1994).

First, the context of practicing CPA is one ofuncertainty, characterized by information asym-metry, multiple actors, institutional constraints,time pressure, and considerable causal ambigu-ity between actions and outcomes (Baumgartneret al., 2009; Hansen, 1991; Hart, 2004). In con-trast to many market strategies, where feedback isswift and clear, the feedback from CPA expendi-tures is slower and the cause-effect is ambiguous.(Hart, 2004: 56) notes:

‘Corporate government affairs officials oftenstate candidly in interviews that they are simplyguessing as they go about their work. Indeed,

the degree to which their efforts should beevaluated in terms of calculable profit and lossis sometimes a matter of intense disagreementbetween the Washington office and financiallyminded executives at headquarters.’

Second, to deal with uncertainty, organizationsoftentimes develop patterns of decision makingcalled standard operating procedures (SOPs; seeAllison, 1971), which circumscribe a set of actionsfor a particular situation. Lobbying a member ofCongress and contributing to his or her campaignmight be SOPs called ‘share information with pub-lic official’ and ‘support elected official.’ Rou-tines are developed over time, institutionalized,and maintained unless clearly seen to lead to aninferior outcome (Snyder, 1992). Given the uncer-tainty of the political process and the ambiguityof measuring the benefits and costs of firm politi-cal activities (Kroszner and Stratmann, 2005), it isunlikely that most political SOPs will be deeplyscrutinized for their effect on financial perfor-mance (Hart, 2004).

Combining political science’s competitive natureof political markets, which emphasizes the poten-tial for crowding out by policy demanders anda zero-sum payoff dynamic to CPA, and orga-nization theory’s behavioral view of the firm,which suggests that firms face considerable dif-ficulties in evaluating CPA investments, we pre-dict that firm political investments will not bepositively associated with a firm’s financialperformance.

Hypothesis 1b: Corporate political investmentsin lobbying and campaigns will not be positivelyassociated with corporate financialperformance.

Other forms of CPA

Unlike annual corporate political investments,there may be some forms of CPA that exhibit apositive relationship to a firm’s financial perfor-mance. In this section, we examine two additionalforms of CPA: (1) a firm’s cumulative CPI; and(2) human capital specific CPA. We offer argu-ments supporting a positive relationship betweeneach of these forms of CPA and firm financialperformance.



Cumulative corporate political investments

We earlier described the interaction between firmsand policy makers as a political marketplace withexchanges between firms as policy demandersand public officials as policy suppliers (Bonardiet al., 2005; Hillman and Hitt, 1999). Much likeother social exchanges, building a relationshipover time and gaining a shared understanding ofthe issue is seen as necessary to achieve policygoals. Hansen’s (1991) seminal analysis of theimpact of the farm lobby on legislatures indi-cates that firms gain a premium for access bybuilding ties with policy makers through theirrepetitive political activities and the accumulatedimpact of such activities. As noted by Snyder(1992: 17):

‘A contributor cannot simply buy a congress-man’s vote on an important bill with a $5,000campaign donation. Large donations over sev-eral elections, however, together with intelli-gent, informative discussions about matters ofconcern to the contributor, may eventually yieldconsiderable benefits.’

Cumulative corporate political investments(CCPI) in lobbying and political campaigns offeradvantages to a firm such as gaining the confi-dence of public officials, learning about the policy,and assessing the reliability of the various actors(Grenzke, 1989). Firms desire to observe legisla-tors and other public officials over time to morefully assess their intentions and behaviors and toreduce information asymmetries between the par-ties (Clawson et al., 1998). Long-term interactionscultivated through lobbying and campaign activ-ities increase the firm’s confidence that it willreceive favorable policy decisions from the publicofficials with whom they have had long-standinginteractions (Kroszner and Stratmann, 2005).

Based upon this logic, we predict that firmsmaking cumulative corporate political investmentswill improve its odds of success in the publicpolicy arena and create financial value.

Hypothesis 2: Cumulative corporate politicalinvestments in lobbying and campaigns will bepositively associated with corporate financialperformance.

Human capital specific CPA: ‘political service’

A potential deficiency of focusing only upon afirm’s investments in lobbying and campaignsis that they are easily replicable by other firms(Dahan, 2005). Firms may generate more value byemploying CPA tactics that are more idiosyncratic,difficult to imitate, and tacit (Hillman et al., 1999)than by using these familiar lobbying and politicalcampaign activities.

A form of CPA that may add value to a firm isthe hiring of former public officials as directors,a practice that has been termed ‘personal service’(Hillman et al., 1999), we call it here ‘politicalservice.’ Extant scholarship has established thestrategic importance of such directors to mitigatepolicy uncertainty, to manage resource dependenceon the government, and to gain ‘private’ informa-tion about policy not available to the general pub-lic (Agrawal and Knoeber, 2001; Hillman et al.,1999). Hillman (2005) finds, in a cross-sectionalsample of 300 firms, that the firms that added for-mer public officials to their boards are able toimprove their short-term and long-term financialperformance, particularly for firms from regulatedsectors. Two other studies also show that firms’announcements of hiring directors who had pre-vious political experience resulted in abnormallypositive stock returns (Goldman, Rocholl, and So,2009; Hillman et al., 1999). Thus:

Hypothesis 3: Having former public officialsserve on a firm’s board of directors will bepositively associated with corporate financialperformance.

Lastly, we explore the possible boundary con-ditions under which CPA may be more or lesseffective in affecting firm performance. Specifi-cally we look at the moderating effect of industryregulation.

Boundary conditions: industry regulation andcorporate political investments in lobbying

Regulation, the limitations on firm behaviorsplaced by governments (i.e., via regulatory agen-cies), has long been cited as an impetus forCPA (Peltzman, 1976; Stigler, 1971). When firms’strategic behaviors are controlled by the govern-ment, such as the ability to produce their productby a certain method or to price their products andservices at a specific rate, firms have incentives to



ensure that the government’s rules are written toserve their interest.

On the government’s side, regulators need infor-mation about the issue area to pursue their goals,such as maintaining the agency’s autonomy,expanding its policy jurisdiction, and expandingthe regulators’ prestige (Bonardi et al., 2005; Hill-man, 2005). Bureaucrats are likely to grant accessto informants with technical and unique knowl-edge about the issue (Bouwen, 2002), the abil-ity to create assessments of alternatives and solu-tions (Furlong, 2005), and ones seen as trustworthy(Bonardi et al., 2006). Firms are generally wellpositioned to supply bureaucrats with high qual-ity information about their business and industry,such as through setting up private meetings, pro-viding white papers, bringing in outside experts,testifying at regulatory hearings, and offering com-ments during public comments periods. Empiricalevidence supports the notion that a firm’s politicalactivities directed at regulatory agencies may bepositively linked to financial performance (McKayand Webb-Yackee, 2007). Bonardi and his coau-thors (2006) find that utilities’ experience testify-ing before regulatory agencies increased their rateof return. de Figueiredo and Silverman’s (2006)study provides support that university lobbying ofnational educational regulators enhanced the lev-els of federal financial support received. Together,these theoretical arguments and empirical evidencelead us to argue that under conditions of regulation,firms that engage in corporate political activitiesmay enjoy superior financial performance.

Hypothesis 4: Industry regulation will strength-en the positive relationships between corporatepolitical investments and cumulative corporatepolitical investments and corporate financialperformance.

DATA AND METHODS

The dataset targets the entire set of firms in theStandard & Poor’s (S&P) 1500 database for theyears 1998–2008. Of these S&P 1500 firms, weinclude the 1,114 firms with available financialdata for the entire period, reducing the numberfor firms missing certain data across the period,leaving a final sample of 943 large and mid-capfirms. Attrition from the 1,114 to the 943 firmswas random. Our number of firm-year observations

varies based on the dependent variable explored:it is 8,410 for market value and 10,204 for ROS.Across years, 44 percent of the firms were polit-ically active (i.e., CPI > 0) while 56 percentwere not.

Measures

Dependent variables

We use two complementary measures of firm per-formance: (1) market value (dollar value of firms’equity at the end of the firm’s calendar year); and(2) ROS (net income before extraordinary items tototal revenue).

Independent variables

Corporate political investments (CPI). Firmsinvest in lobbying, PAC contributions, soft moneycontributions (legal until 2003), and contributionsto 527 groups. Exploratory factor analysis val-idated that these four measures constituted onefactor, which we call ‘corporate political invest-ments,’ regardless of the rotation method used.Data sources include the Web sites of the Centerfor Responsive Politics (2011), Federal ElectionCommission, and the Senate’s Office of PublicRecords, and reflect federal-level data.

Cumulative CPI (CCPI). Cumulative CPI is thefirm’s cumulative spending on PAC, lobbying, softmoney, and 527 groups across sample years. Themeasure reflects the current year’s CPI plus theprevious years’ CPI.

Board political service. For each firm, we cre-ate a dummy variable to represent the existenceof directors with prior public service. We includeany political service tie between directors and fed-eral or state institutions, including federal publicservice as members of the U.S. Congress, ambas-sadors, ministers, secretaries, and undersecretaries,as well as service in state government such asgovernors and legislators. We examined directors’personal biographies available via the CorporateLibrary database and firms’ 10-K reports.2

2 We also ran models using the actual count of the number of firmdirectors with former government service. The results of thesemodels are similar to those we report treating former directorsas a dummy variable.



Regulation. We use a dummy measure of reg-ulation that differentiates between regulated andnonregulated industries based on Grier, Munger,and Roberts (1994). For example, regulated indus-tries include utilities, telecommunications, trans-portation, energy, banking, oil, and insurance.

Controls. We include the following eight vari-ables as controls: (1) a dummy variable to capturefirm participation in collective level CPA throughpeak or trade organizations;3 (2) lagged firm per-formance (market value or ROS, depending onthe dependent variable in the model); (3) firm size(logged number of employees); (4) firm diversi-fication (the Herfindahl measure); (5) board size;(6) board independence; (7) year dummy; and(8) industry dummy.

Analyses

Our final dataset is unbalanced because it includesfirms with varying degrees of year observations. Inorder to analyze unbalanced panel data with bothfixed and random variance components, we utilizea repeated measures longitudinal analysis usinga mixed-effects model analysis, with a repeatedrandom firm-level component and fixed year andindustry dummies (Baltagi and Chang, 1994; Lit-tell, Henry, and Ammerman, 1998; Singer, 1998).The mixed effects approach uses restricted maxi-mum likelihood estimators, which are preferable tothe sum of squares estimators when dealing withunbalanced data (Searle, Casella, and McCulloch,1992), and is comparable to using a traditionalpanel data approach (Wooldridge, 2002).4 Mixed-effects models also reduce bias stemming fromserial correlation or random firm related factors.

However, we face an additional modeling chal-lenge. Given that CPA is influenced by existingfirm characteristics such as firm performance andsize, we may have an endogeneity issue includingour CPI measures alongside our control variables(Hillman, 2005). By including raw CPI values, wemay be confounding past performance or firm size

3 Data were collected via CRP.org and the Center for PoliticalAccountability. We first identified over 40 trade and industry col-lective organizations (such as the U.S. Chamber of Commerce,American Healthcare Association, Food Marketing Association,etc.) that contributed to federal elections. Firms contributing toany of these organizations were coded as 1; 0 otherwise.4 Such models are equivalent to panel data analysis, using proctscsreg (see http://support.sas.com/kb/22/851.html).

with present performance, our dependent variable,since CPI values may be impacted by past perfor-mance or size. We use a two-stage regression pro-cedure to correct for such a possibility. Given thatwe have data on both politically active and non-politically active firms, the distribution of firms’CPI and CCPI are truncated to the left (to zero).Because a truncated distribution biases ordinaryleast squares regression (Grier et al., 1994), weuse a variation of the repeated measures approachfor unbalanced data with a correction for a zero-truncated or censored distribution (see, e.g., Bel-lamy et al., 2004).

Using the above procedure, we created a first-stage regression using variables identified in thescholarly literature that likely affect CPI. Specifi-cally, our first-stage regression is:

CPI or CCPIit+1 = β1Year (dummies)

+ β2Performanceit(or cumulative performance)

+ β3Regulationit + β4Other firms’ CPIit

(or other firms’ cumulative CPI) + β5Firm sizeit

(or cumulative size) + β6Firm diversificationit

(or cumulative diversification) + εit.

We ran the first-stage model four times: (1) forCPI using lagged market value as the perfor-mance predictor; (2) for CPI using ROS as theperformance measure; (3) for cumulative CPI withlagged market value; and (4) for cumulative CPIusing ROS as lagged performance measures (therest of the predictors were the same). We thenchose an instrument for CPI and CCPI. Here wehad a choice between the predicted or the residualvalues of CPI and CCPI as possible instrumentsin our second-stage regressions.5 Our choice of aninstrumental variable reflects several requirements:(1) it explains a substantial amount of the varianceof CPI and CCPI; (2) the first-stage predictors ofthe instrument need to be exogenous to the second-stage dependent variable (see Hausman, 1978; Fos-ter and McLanahan, 1996); and (3) the use of theinstrument increases the fit of the final regressionmodel (Snijders and Bosker, 1999).

Choosing the residual values of CPI and CCPIfrom the first-stage regression fulfilled these

5 The use of residuals as an instrument is quite common. See,for example, Core and Guay, 1999.



requirements. First, the predicted CPI and CCPImeasures explained only around 14 percent ofvariance in raw CPI and CCPI values, while theresiduals retained the majority of variance in thevariables (see Appendix). This is in line with theliterature reviews showing that while many fac-tors may influence CPI, very few do so to a largeextent (for example Hillman et al., 2004). Second,by using the residuals of the first-stage regression,we ensure that none of the significant predictors ofCPA (e.g., lagged performance, firm size, regula-tion) repeat themselves in the second-stage regres-sion, maintaining their required exogenous naturewith regard to the second-stage regression. Lastly,and most importantly, we compared the overallfit of the second-stage model using the predictedinstruments of CPI and CCPI compared to theresidual instruments of CPI and CCPI. We foundthat models that used the residual instruments aresuperior in fit to those that used predicted valuesof CPI or CCPI. Therefore, we used the residualvalues of CPI and CCPI in our second-stage regres-sion model:

Firm performance measures (Market value or

ROS)it + 1 = β1Year (dummies)

+ β2Industry (dummies)it + 1β3Firm

performance (either Market value or ROS)it

+ β4Regulationit + β5Diversifificationit

+ β6Board sizeit + β7Board independenceit

+ β8Board political serviceit

+ β9CPI (residuals)it + β10CPI (residuals)∗

Regulation + εit

RESULTS

Table 1 reports the cross-sectional means, stan-dard deviations, and correlations across our sampleyears. The correlations between market value andCPI, CCPI, and board political service are posi-tive, but much smaller after running the two-stagecorrection. The correlations between ROS and CPI,CCPI, and board political service are close to zero.

For each of the two dependent variables, we runfive models: (1) a control model; (2) a model withCPI and board political service; (3) a model withCCPI and board political service; (4) a model with Tabl

e1.

Des

crip

tive

stat

istic

san

dco

rrel

atio

nm

atri

xa

Var

iabl

esM

ean

SD1

23

45

67

89

1011

1.C

orp.

polit

ical

inve

stm

ents

428,

408

1,69

4,45

2—

2.C

umul

ativ

eco

rp.

polit

ical

inve

stm

ents

4,06

0,98

88,

664,

713

0.78

—3.

Boa

rdpo

litic

alse

rvic

e0.

060.

250.

100.

05—

4.R

egul

atio

n0.

040.

200.

090.

110.

03—

5.Fi

rmsi

zec

1.86

1.64

0.29

0.28

0.12

0.05

—6.

Firm

dive

rsifi

catio

n0.

580.

920.

010.

010.

000.

000.

05—

7.B

oard

size

10.6

3.62

0.22

0.24

0.03

0.08

0.35

0.00

—8.

Boa

rdin

depe

nden

ce0.

760.

130.

100.

050.

040.

060.

170.

040.

20—

9.T

rade

orga

niza

tion

part

icip

atio

n0.

090.

290.

150.

160.

040.

110.

180.

020.

200.

07—

10.

Mar

ket

valu

eb10

,808

29,8

690.

470.

420.

100.

060.

390.

080.

260.

060.

22—

11.

Ret

urn

onsa

les

−0.0

18.

140.

00−0

.03

0.00

0.00

0.08

0.02

0.01

0.00

0.00

0.08

—

Cor

rela

tions

grea

ter

than

0.03

are

sign

ifica

ntat

p<

0.01

;co

rrel

atio

nsgr

eate

rth

an0.

05ar

esi

gnifi

cant

atp

<0.

001;

corr

elat

ions

grea

ter

than

0.07

are

sign

ifica

ntat

p<

0.00

0.a

Cro

ss-s

ectio

nal,

1998

–20

08.

Neq

uals

8,41

0fo

rco

rrel

atio

nsre

ferr

ing

tom

arke

tva

lue,

and

10,2

04fo

rth

ose

refe

rrin

gto

retu

rnon

sale

s.b

Mar

ket

valu

ein

mill

ions

ofdo

llars

.c

Log

ofnu

mbe

rof

empl

oyee

s(i

nth

ousa

nds)

.



Table 2. Regression analysis for market value

Market value

Model Control Model 1 Model 2 Model 3 Model 4

Year (dummies)Industry (dummies)Lagged market value 0.40∗∗∗∗ 0.39∗∗∗∗ 0.40∗∗∗∗ 0.39∗∗∗∗ 0.40∗∗∗

Regulation 0.16 0.17 0.17 0.20∗ 0.18Firm Size 0.09∗∗∗∗ 0.09∗∗∗∗ 0.09∗∗∗∗ 0.08∗∗∗∗ 0.08∗∗∗∗

Firm diversification 0.01 0.02 0.02 0.01 0.02Board size 0.04∗ 0.04∗ 0.05∗ 0.04∗ 0.05∗

Board independence −0.00 −0.04 −0.01 −0.01 −0.01Trade organization participation −0.01 −0.01 0.04 −0.01 0.04Corp. political investments (CPI) −0.04∗∗∗∗ −0.09∗∗∗∗

Cumulative corp. political investments (CCPI) −0.04∗∗∗∗ −0.07∗∗∗∗

Board political service −0.06∗∗∗∗ −0.06∗∗∗ −0.05∗ −0.03∗

CPI∗ regulation 0.09∗∗∗

CCPI∗ regulation 0.12∗∗∗

−2 Residual log likelihood 5554∗∗∗∗ 5490∗∗∗∗ 4319∗∗∗∗ 5434∗∗∗ 4268∗∗∗∗

Change in log likelihood 64∗∗∗ 1235∗∗∗ 118∗∗∗ 1286∗∗∗∗

a The N for models referring to market value is 8,410; The N for models referring to ROS is 10,204. Regression coefficients arestandardized. †p < .10, ∗ p < .05, ∗∗ p < .01, ∗∗∗ p < .001, ∗∗∗∗ p < .0001.

CPI and board political service and an interactionterm of CPI and regulation; and (5) a model withCCPI and board political service and an interactionterm of CCPI and regulation. Table 2 reports theresults of the regression analyses for market valueand Table 3 for ROS.

Our first set of hypotheses concerns the relation-ship between CPI and firm performance. Hypothe-sis 1a predicts a positive relationship and Hypoth-esis 1b predicts no statistically significant relation-ship. We find that CPI are negatively associatedwith market value (Table 2. Model 1: β = −0.04,p < 0.0001; Model 3: β = −0.09, p < 0.0001),contrary to both hypotheses. CPI are either not sta-tistically associated with ROS (Table 3. Model 1:β = −0.01, p > 0.10) or are marginally and neg-atively associated with ROS (Table 3. Model 3:β = −0.01, p < 0.10). This contradicts Hypothe-sis 1a and partially supports Hypothesis 1b.

Hypothesis 2 proposes that CCPI will be pos-itively associated with financial performance. Wedo not find support for this hypothesis. We findthat CCPI are negatively associated with marketvalue (Table 2. Model 2: β = −0.04, p < 0.0001;Model 4β = −0.07, p < 0.0001) and ROS(Table 3. Model 2: β = −0.01, p < 0.05; Model4: β = −0.01, p < 0.05).6

6 Some argue that PAC contributions reflect a different relationaldynamics than lobbying. Thus, we ran separate regression anal-yses using PAC and lobbying expenditures in place of their

Hypothesis 3 predicts that hiring board mem-bers with former public service will be positivelyassociated with firm financial performance: wedo not find support for Hypothesis 3. We findthat board political service is negatively asso-ciated with market value (Table 2. Model 1:β = −0.06, p < 0.0001; Model 2: β = −0.06,p < 0.001: Model 3: β = −0.05, p < 0.05; Model4: β = −0.03, p < 0.05), but not significantlyassociated with ROS (Table 3. Model 1: β = 0.01,p > 0.10; Model 2: β = 0.00, p > 0.10; Model 3:β = 0.01, p > 0.10; Model 4: β = 0.01, p > 0.10).

Hypothesis 4 suggests that conditions of indus-try regulation will strengthen the positive relation-ships between CPI and CCPI and corporate finan-cial performance. Before discussing the results,it is important to note that the meaning of theCPI/CCPI interaction coefficients in the regressionmodels involving the interaction of regulation andCPI/CCPI reflect not the mean effect of CPI/CCPIacross firms, but rather the difference betweenregulated and nonregulated firms. This hypothesisreceived only partial support. For market value, thecoefficient of CPI*REG is significant (β = 0.09, p< 0.001, Table 2, Model 3). This indicates thatthere is a significant difference in the effect of CPIfor regulated versus nonregulated industries. Yet it

combination (CPI). The results of these regressions on eachdependent variable were essentially the same as the combinedvariable.



Table 3. Regression analysis for return on sales

Return on sales

Model Control Model 1 Model 2 Model 3 Model 4

Year (dummies)Industry (dummies)Lagged return on sales 0.26∗∗∗∗ 0.24∗∗∗∗ 0.23∗∗∗∗ 0.23∗∗∗∗ 0.23∗∗∗∗

Regulation 0.30 0.03 0.04 0.03 0.03Firm size 0.36 −0.03∗∗ −0.03∗∗ −0.01∗ −0.01∗

Firm diversification 0.03 0.27∗ 0.26∗ 0.25∗ 0.25∗

Board size 0.17 0.01∗ 0.01∗ 0.01∗ 0.01∗

Board independence −0.08 −0.04 −0.04 −0.03 −0.03Trade organization participation −0.20 −0.02 −0.04 −0.04 −0.04Corp. political investments (CPI) −0.01 −0.01†Cumulative corp. political investments (CCPI) −0.01∗ −0.01∗

Board political service 0.01 0.00 0.01 0.01CPI∗ regulation 0.01CCPI∗ regulation 0.01−2 Residual log likelihood 64425∗∗∗∗ 1060∗∗∗∗ 1097∗∗∗∗ 648∗∗∗∗ 1102∗∗∗∗

Change in log likelihood 63365∗∗∗∗ 63328∗∗∗∗ 63777∗∗∗∗ 63323∗∗∗∗

a The N for models referring to market value is 8,410; The N for models referring to ROS is 10,204. Regression coefficients arestandardized. †p < .10, ∗ p < .05, ∗∗ p < .01, ∗∗∗ p < .001, ∗∗∗∗ p < .0001.

does not tell us if CPI under regulation is benefi-cial or not. To test the hypothesis that CPI underregulation benefits firm performance, we reran theanalysis, creating a dummy variable called ‘unreg-ulated,’ and created an interaction term. We fol-low guidelines for the interpretation of interactionterms to include a dummy and a continuous vari-able (see Hardy, 1993: 33–48).7 This analysis pro-duced a coefficient on CPI for regulated firms thatis not statistically significant (β = 0.00, p > 0.05).Hence, we find no evidence of a significant effectof CPI on the market value of regulated firms; reg-ulation does not moderate the relationship betweenCPI and market value.

We next consider the effects of CCPI on marketvalue of firms in regulated industries. The coef-ficient on the interaction term of CCPI and reg-ulation (Table 2, Model 4: β = 0.12; p < 0.001)means that there is a difference in the effect of

7 When including an interaction term that incorporates a dummyvariable and continuous variable, coefficients on the lower-order continuous term in models containing the interaction termare interpreted as representing the effect of the continuousvariable for the group that corresponds to dummy variable = 0(Hardy, 1993). Hence, in models in which the dummy variable‘regulated’ = 1 for regulated, 0 for nonregulated, the coefficienton CPI captures the effect of corporate political activity whenREG = 0. We thus reran our analyses, creating an ‘unregulated’dummy variable = 1 if unregulated, and which equals 0 ifregulated, and using that dummy in the product term to generatethe coefficient of CPI for regulated firms (i.e., UNREG=0).

continuous corporate political activity for firmsoperating under regulation and those not operatingunder regulation. To test our hypothesis regardingthe effect of CCPI for firms in regulated indus-tries, we again reran our analysis using the unreg-ulated dummy variable (not shown). The analysisreveals a significant coefficient on CCPI for reg-ulated firms (β = 0.05; p > 0.0001). In terms ofmarket value, firms from regulated industries real-ize a significant financial benefit from their CCPI.Regulation does moderate the effects of CCPI onmarket value, confirming Hypothesis 4.

We further tested our hypotheses about theeffects of corporate political activity under con-ditions of regulation on a firm’s ROS. As shownin Table 3, neither the interaction term for CPI andregulation nor CCPI and regulation are significant(Table 3. Model 3: β = 0.01, p < 0.05; Model 4:β = 0.01, p > 0.05). Thus, there is no evidence ofa moderating effect regarding regulation and CPIor CCPI for ROS.

DISCUSSION

Sixteenth century European explorers, includingthe Spaniard Gonzalo Pizarro in 1541, the SpaniardGonzalo Jimenez de Quesada in 1569, and theEnglish Sir Walter Raleigh in 1595 probed the jun-gles and valleys of the northern reaches of South



America in search of El Dorado, the legendarylost city of gold, but came up empty. Similarly,in a modern day tale, there is a belief that politi-cal investments in Washington, D.C., by firms willproduce riches around the river’s next bend (i.e., anew law; a favorable regulatory ruling). Unfortu-nately for these firms, as with the aforementionedexplorers, our results strongly show that the lucra-tive financial returns may never materialize.

The belief that CPA brings financial returns tofirms finds its basis in three literatures: industrial-organization economics, resource dependence, andclass unity. The first two theories share the com-mon grounds that decision makers within the firmaim to serve the firm to the best of their ability, areable to scan, gather, and process external informa-tion, and make rational decisions toward optimalfirm outcomes. Class unity theory assumes that theinterpersonal and interorganizational relationshipsbetween business managers and government offi-cials contain information, trust, and other resourcesthat are valuable to the firm. Yet our results fromthe analyses of the political activities and finan-cial performance of 943 S&P 1500 firms over an11 year period largely do not bear out support forthe hypotheses derived from such theories.

The largely unexpected results, in particular thenegative relationship between all three measuresof CPA and a firm’s market value, merit spe-cific attention. While the political marketplace andbehavioral theory of the firm explanations usedearlier to propose a neutral relationship betweenCPA and financial performance (Hypothesis 1b,note that this result was largely borne out bythe results from the models using ROS as thedependent variable) are not incompatible with afirm’s CPA being associated with negative finan-cial performance, we do not believe these litera-tures support outright a direct negative relationshipbetween CPA and firm outcomes across firms andacross time. Instead, we offer four reasons basedon agency theory to better explain the negativerelationship8 that we found between CPA and mar-ket value.

First, senior managers who support CPA may ingeneral take overly risky business decisions. Iganand colleagues (2009) report that financial firms’lobbying was associated with higher risk taking ex

8 One of the reviewers notes that agency theory also supportsa neutral view about the relationship between CPA and firmfinancial performance.

ante and worse performance ex post, measured asnegative abnormal stock returns, arguing that suchfirms not only took excessive risks but also wereoverly confident about government assistance tocover up any shortcomings, the moral hazard prob-lem. Two studies (Faccio, 2006; Faccio, Masulis,and McConnell, 2006) similarly show that polit-ically active companies took unwarranted riskscompared with less politically active firms, posit-ing that these firms anticipated governmental assis-tance if their risky decisions failed to materialize.

Second, CPA may represent poor quality invest-ments, something economists have termed ‘directlyunproductive profit-seeking activities’ (Bhagwati,1982). The managers charged with CPA mayinsufficiently evaluate and overvalue such invest-ments. Recent work by Bonardi (2008) shows thatfirms engaging in CPA may be diverting internalresources into political pursuits over more lucrativemarket activities; in this way, CPA acts as a substi-tute, instead of a complement, to market strategy.Furthermore, some economists focus on the oppor-tunity costs and social welfare losses of politicalinvestments compared with other investments afirm might make in technology, human resources,and research and development (Bhuyan, 2000).

Third, CPA is difficult for shareholders to mon-itor compared with many other firm strategies.While federal disclosure laws require firms toreport their PAC and lobbying expenditures tothe government, firms are not required to reportmany political expenses in their annual finan-cial reports. This creates information asymmetriesbetween shareholders and managers, which havebeen associated with moral hazards and increasedagency costs (Igan et al., 2009). Three recent stud-ies support the argument that CPA increases infor-mation asymmetries between management andshareholders (Chaney, Faccio, and Parsley, 2010;Hadani, 2012; Yu and Yu, 2011).

Fourth, personal reasons of senior managers,such as self-aggrandizement, ideological beliefs,desire to voice (Ansolabehere, Snyder, and Tri-pathi, 2002; Avery and Quinones, 2002), andmimetic pressures (Mizruchi, 1992), which arenot necessarily profit driven, may drive CPA.This interpretation of personal incentives for CPAis bolstered by studies associating CPA withincreased executive compensation and job security(Arlen and Weiss, 1995; Coates, 2012).

We were surprised to find that firms hiring boardmembers with former public service did not realize



better financial returns. We assumed that politicallytied directors provide a direct form of access topolicy makers that help a firm to compete. How-ever, our results show that having such directorsreduced a firm’s market value. Several importantconsiderations qualify the ability of former pub-lic officials, serving as directors, to benefit firms’bottom line. First, the nature of political connec-tions is heterogeneous; former public officials mayvary in their business acumen and their ability toconduct thorough oversight (Faccio, 2006). Sec-ond, the political ties such directors have may belimited to a short time frame and may degradeover time (Lester et al., 2008). Lastly, the valueof politically tied directors may fluctuate based onpolitical events, such as a change of the politicalparty in power, which lie beyond firms’ control(Goldman et al., 2009).

We found one exception to our story. Firmsin regulated industries that invested over time inpolitical access, enjoyed superior market returnsto firms with lower investments. This may reflectthe critical role that government can play in con-trolling resources and limiting behaviors throughits rulemaking and enforcement processes, neces-sitating some level of political activities by theregulated firms (Furlong, 2005). We note that inregulated industries, firms are better able to tar-get specific agencies and get to know their staff,which is more likely to result in more stable inter-actions. The results about the regulated industriesalso support an agency theory explanation. In thecase of regulated firms, it may be that the prefer-ences and incentives of managers and owners aremuch better aligned with regard to political invest-ments, but only when such investments are madeover the long term. While managers may pursuepolitical activities for their own personal objec-tives and without much oversight, in the regulatedcontext, political activities might also be expectedto favor owners. If firms manage to establish rela-tionships with policy makers over time, as impliedby CCPI, they may be able to influence the creationof rules in a manner to improve their financial per-formance over firms taking less politically activeroles (see Coates, 2012).

This study raises several concerns for managersof politically active firms. First, managers shouldhave a more realistic expectation about the returnon investment of their firm’s CPA. If other firms inthe same industry are politically active it may be agood idea to be politically active to maintain access

parity, but this is less likely to bring about signif-icant returns. Second, under regulation it makessense to engage in CPA, but in doing so the firmneeds to ensure it interacts closely with regula-tors to provide information and guidance over along period of time in order to build relationalcapital. Lastly, the hiring of former politiciansto the board should be closely scrutinized—suchdirectors should be hired for shorter tenures andtheir contributions assessed more closely, as not todevelop overreliance on directors whose shelf lifemight expire rapidly and whose expertise might belimited to one domain.

Limitations

Like many empirical studies, we did not have allthe data we desired. Given the post hoc analysisfeaturing agency theory, it would have been idealto have such variables as the oversight and report-ing structure of government affairs, the internalassessment process for government affairs man-agers and other senior managers, the compen-sation structure of government affairs and othersenior managers, and other such variables. Wewould have benefited from more detailed informa-tion about the quantity and quality of relationshipsbetween the politically tied board members andpublic officials. These variables are not generallyavailable without undertaking interviews or sur-veys of firms.

We also would have preferred more measuresabout CPA. From their interviews, Baumgartnerand his colleagues (2009: 151) classify politicaltactics into (1) ‘inside advocacy,’ including per-sonal meetings with rank and file members ofCongress or staff, working with legislative allies,disseminating external research to policy mak-ers, testifying at congressional hearings, draft-ing legislative and regulatory language, and otheractivities; and (2) ‘grassroots advocacy,’ includ-ing mobilizing mass membership, mobilizing elitemembership, organizing a lobby day, and mobiliz-ing the general public. Some of these data are notpublicly disclosed, such as personal meetings.9 Wedid not look at CPA directed toward state and localgovernments. It is possible that in some states due

9 There also exists the possibility that there are clandestinepolitical activities, such as ‘secret meetings’ or a contract orjob recommendation for a connected person, that is, a spouse orsibling, or even illegal political activities, such as bribery (‘payto play’), that would not be discovered through such interviews.



to lax regulatory constraints firms would be able tobetter leverage their CPA for financial gain, suchas the receipt of local-level tax benefits (Witko,2005), although the evidence remains inconclusive(Moore and Giovinazzo, 2011).

Future research

The empirical results from our analysis of943 S&P 1500 firms over the period 1998–2008are the strongest yet to show that the forms of CPAwe studied do not increase the positive financialvalue of the firm. This pushes researchers to reex-amine the primary theoretical drivers of CPA. Weare encouraged that recent scholarship has revis-ited agency explanations for these results aboutCPA. This may require a move from the publiclyavailable information (i.e., 10-Ks, media proxies)to observation, interviews, and surveys about thefirms under investigation. Further, looking into theimpact of state- versus federal-level CPA may bewarranted, taking into account the significant vari-ance in state-level disclosure laws.

Lastly, the recent aforementioned decision bythe U.S. Supreme Court may be perceived byfirms as providing them carte blanche with regardto making political investments, assuming thesepositively impact firms’ bottom line. It will beinteresting to compare the pattern of firms’ CPAbefore and after this judicial decision, as well asits relationship to firm financial performance, tosee whether this is observed.

ACKNOWLEDGEMENTS

We thank the Editor and the three anonymousreviewers for their excellent comments and guid-ance through this process. We thank Maura Bel-liveau, Nicholas Dahan, Amy Hillman, GerryKeim, Marvin McNeese, Rick Vanden Bergh, andRichard Swartz for comments on earlier versionsof the manuscript. We also thank Kristen Hoganfor her dedicated research assistance.

REFERENCES

Aggarwal RK, Meschke F, Wang TY. 2011. Corporatepolitical donations: investment or agency? Businessand Politics 14: 1469–3569.

Agrawal A, Knoeber CR. 2001. Do some outsidedirectors play a political role? Journal of Law andEconomics 44: 179–198.

Allison GT. 1971. Essence of Decision: Explaining theCuban Missile Crisis . Little, Brown and Company:Boston, MA.

Ansolabehere SD, Snyder JM, Tripathi M. 2002. ArePAC contributions and lobbying linked? New evidencefrom the 1995 Lobby Disclosure Act. Business andPolitics 4: 131–155.

Ansolabehere SD, Snyder JM, Ueda M. 2004. Did firmsprofit from soft money? Election Law Journal 3:199–137.

Arlen J, Weiss D. 1995. A political theory of corporatetaxation. Yale Law Journal 105: 325–392.

Avery DR, Quinones MA. 2002. Disentangling theeffects of voice: the incremental roles of opportunity,behavior, and instrumentality in predicting proceduralfairness. Journal of Applied Psychology 87: 81–86.

Baltagi BH, Chang Y. 1994. Incomplete panels: acomparative study of alternative estimators for theunbalanced one-way error component regressionmodel. Journal of Econometrics 62: 67–89.

Baron DP. 1995. Integrated strategy: market and nonmar-ket components. California Management Review 37:47–65.

Baumgartner FR, Berry JM, Hojnacki M, Kimball DC,Leech BL. 2009. Lobbying and Policy Change: WhoWins, Who Loses, and Why? University of ChicagoPress: Chicago, IL.

Bellamy SL, Li Y, Ryan LM, Lipsitz S, Canner MJ,Wright R. 2004. Analysis of clustered and intervalcensored data from a community-based study inasthma. Statistics in Medicine 23: 3607–3621.

Bhagwati JN. 1982. Directly unproductive profit-seekingactivities. Journal of Political Economy 90: 988–1002.

Bhuyan S. 2000. Corporate political activities andoligopoly welfare loss. Review of Industrial Organi-zation 17(4): 411–426.

Blumentritt TP. 2003. Foreign subsidiaries’ governmentaffairs activities: the influence of managers andresources. Business and Society 42: 202–233.

Bonardi JP. 2008. The internal limits to firms’ nonmarketactivities. European Management Review 5: 165–174.

Bonardi JP, Hillman AJ, Keim GD. 2005. The attractive-ness of political markets: implications for firm strat-egy. Academy of Management Review 30: 397–413.

Bonardi JP, Holburn G, Vanden Bergh RG. 2006.Nonmarket strategy performance: evidence from U.S.electric utilities. Academy of Management Journal49(6): 1209–1228.

Bouwen P. 2002. Corporate lobbying in the EuropeanUnion: the logic of access. Journal of European PublicPolicy 9: 365–390.

Burris V. 2005. Interlocking directorates and politicalcohesion among corporate elites. American Journal ofSociology 111: 249–283.

Campaign Legal Center. 2010. Brief Amici Curiae ofCampaign Legal Center, Democracy 21, CommonCause, US PIRG, Americans for Campaign Reform,League of United Latin American Citizens, AsianAmerican Legal Defense and Education Fund in



Support of Appellee on Supplemental Question. OnAppeal from the U.S. District Court for the District ofColumbia. 08–205.

Caves R. 1964. American Industry: Structure, Conduct,Performance. Prentice-Hall: Englewood Cliffs, NJ.

Center for Responsive Politics. 2011. www.opensecrets.org. (12 January 2011).

Chaney P, Faccio M, Parsley DC. 2010. The qualityof accounting information in politically connectedfirms. SSRN working paper. Available at http:papers.ssrn.com/sol3/papers.cfm?abstract id=966379(28 June 2012).

Cho CH, Patten DM, Roberts RW. 2006. Corporate polit-ical strategy: an examination of the relation betweenpolitical expenditures, environmental performance,and environmental disclosure. Journal of BusinessEthics 67: 139–154.

Clawson D, Neustadtl A, Weller M. 1998. Dollars andVotes: How Business Campaign Contributions SubvertDemocracy. Temple University Press: Philadelphia,PA.

Coates JC IV. 2010. Corporate governance and corporatepolitical activity: what effect will Citizens United haveon shareholder wealth? Harvard Law School, Discus-sion Paper No. 684, Harvard University: Cambridge,MA. Available at http://ssrn.com/abstract=1680861(28 June 2012).

Coates JC IV. 2012. Corporate politics, governance,and value before and after Citizens United. HarvardLaw School, Working Papers Series. Availableat http://papers.ssrn.com/sol3/papers.cfm?abstract id=1975421 (28 June 2012).

Colman A. 1982. Game Theory and Experimental Games:The Study of Strategic Interaction. Pergamon Press:New York.

Cooper MJ, Gulen H, Ovtchnikov A. 2010. Corporatepolitical contributions and stock returns. Journal ofFinance 65: 687–724.

Core J, Guay W. 1999. The use of equity grants tomanage optimal equity incentive levels. Journal ofAccounting and Economics 28: 151–84.

Cyert RM, March JG. 1963. A Behavioral Theory of theFirm . Prentice-Hall: Englewood Cliffs, NJ.

Dahan N. 2005. Can there be a resource-based view ofpolitics? International Journal of Management andOrganization 35: 8–27.

Dean TJ, Vryza M, Fryxell GE. 1998. Do corporate PACsrestrict competition? An empirical examination ofindustry PAC contributions and entry. Business andSociety 37: 135–156.

de Figueiredo JM, Silverman BS. 2006. Academicearmarks and the returns to lobbying. Journal of Lawand Economics 49(2): 597–626.

Dreiling M, Darves D. 2011. Corporate unity inAmerican trade policy: a network analysis ofcorporate-dyad political action. American Journal ofSociology 116: 1514–63.

Epstein EM. 1969. The Corporation in American Politics .Prentice-Hall: Englewood Cliffs, NJ.

Esty DC, Caves RE. 1983. Market structure and politicalinfluence: new data on political expenditures, activity,and success. Economic Inquiry 21(1): 24–38.

Faccio M. 2006. Politically connected firms. AmericanEconomic Review 96(1): 369–386.

Faccio M, Masulis RW, McConnell JJ. 2006. Politicalconnections and corporate bailouts. Journal of Finance61: 2597–2635.

Foster EM, McLanahan S. 1996. An illustration ofthe use of instrumental variables: do neighborhoodconditions affect a young person’s chance of finishinghigh school? Psychological Methods 3: 249–260.

Furlong Sr. 2005. Exploring interest group participationin executive policymaking. In The Interest-GroupConnection , Herrnson P, Shaiko R, Wilcox C (eds).CQ Press: Washington, DC; 282–297.

Godwin RK, Seldon BJ. 2002. What corporations reallywant from government: the public provision ofprivate goods. In Interest Group Politics, Cigler AJ,Loomis BA, (eds). CQ Press: Washington: DC;205–225.

Goldman E, Rocholl J, So I. 2009. Do politicallyconnected boards affect firm value? Review ofFinancial Studies 22(6): 2331–2360.

Gray V, Lowery D. 1997. Reconceptualizing PACformation: it’s not a collective action problem, andit may be an arms race. American Politics Research25: 319–346.

Grenzke JM. 1989. Shopping in the congressionalsupermarket: the currency is complex. AmericanJournal of Political Science 33: 1–34.

Grier KB, Munger MC, Roberts BE. 1994. The deter-minants of industrial political activity, 1978–1986.American Political Science Review 88: 911–926.

Hadani M. 2012. Institutional ownership monitoring andcorporate political activity: governance implications.Journal of Business Research 65(7): 944–950.

Hall RL, Wayman FW. 1990. Buying time: moneyedinterests and the mobilization of bias in congressionalcommittees. American Political Science Review 84:797–820.

Hansen JM. 1991. Gaining Access: Congress and theFarm Lobby, 1919–1981 . University of ChicagoPress: Chicago, IL.

Hansen W, Mitchell N. 2000. Disaggregating andexplaining corporate political activity: domestic andforeign corporations in national politics. AmericanPolitical Science Review 94: 891–903.

Hardy MA. 1993. Regression with Dummy Variables(Quantitative Applications in the Social Sciences).Sage: Newbury Park, CA.

Hart DM. 2004. Business is not an interest group: onthe study of companies in American national politics.Annual Review of Political Science 7: 47–69.

Hausman JA. 1978. Specification tests in econometrics.Econometrica 46: 1251–1271.

Hersch P, Netter JM, Pope D. 2008. Do campaigncontributions and lobbying expenditures by firmscreate ‘political’ capital? Atlantic Economic Journal36: 395–405.

Hillman AJ. 2005. Politicians on the board of directors:do connections affect the bottom line? Journal ofManagement 31: 464–485.

Hillman AJ, Hitt M. 1999. Corporate political strategyformulation: a model of approach, participation, and



strategy decisions. Academy of Management Review24: 825–842.

Hillman AJ, Keim GD, Schuler DA. 2004. Corporatepolitical activity: a review and research agenda.Journal of Management 30: 837–857.

Hillman AJ, Zardkoohi A, Bierman L. 1999. Corporatepolitical strategies and firm performance: indicationsof firm-specific benefits from personal service inthe U.S. government. Strategic Management Journal20(1): 67–81.

Igan D, Mishra P, Tressel T. 2009. A fistful of dollars:lobbying and the financial crisis. IMF working paper.Available at: www.imf.org/external/pubs/ft/wp/2009/wp09287.pdf. (28 June 2012).

Kersh R. 2002. Corporate lobbyists as political actors:a view from the field. In Interest Group Politics ,Cigler AJ, Loomis BA (eds). CQ Press: Washington,DC; 225–247.

Kleindl B. 1999. A game theoretic perspective on market-oriented versus innovative strategic choice. Journal ofStrategic Marketing 7: 265–274.

Kollman K. 1998. Outside Lobbying: Public Opinion andInterest Group Strategies . Princeton University Press:Princeton, NJ.

Kroszner RS, Stratmann T. 2005. Corporate campaigncontributions, repeat giving, and the rewards tolegislator reputation. Journal of Law and Economics48(1): 41–71.

Lee SE, Baik YS. 2010. Corporate lobbying in antidump-ing cases: looking into the Continued Dumping andSubsidy Offset Act. Journal of Business Ethics 96:467–478.

Lenway SA, Jacobson CK, Goldstein J. 1990. To lobbyor to petition: the political environment of U.S. tradepolicy. Journal of Management 16(1): 119–134.

Lenway SA, Schuler DA. 1991. The determinants ofcorporate political involvement in trade protection:the case of the steel industry. In Empirical Studies ofCommercial Policy Baldwin RE (ed). National Bureauof Economic Research Conference Report. Universityof Chicago Press: Chicago, IL; 75–105.

Lester RH, Hillman A, Zardkoohi A, Cannella AA.2008. Former government officials as outsidedirectors: the role of human and social capital.Academy of Management Journal 51(5): 999–1013.

Liptak A. 2010. Justices, 5-4, reject corporate spendinglimit. New York Times 21 January: A1.

Littell RC, Henry PR, Ammerman CB. 1998. Statisticalanalysis of repeated measures data using SAS proce-dures. Journal of Animal Science 76: 1216–1231.

March JG. 1994. A Primer on Decision Making: HowDecisions Happen . Free Press: New York.

Masters MF, Keim GD. 1985. Determinants of PACparticipation among large corporations. Journal ofPolitics 47: 1158–1173.

McKay A, Webb-Yackee SW. 2007. Interest groupcompetition on federal agency rules. American PoliticsResearch 35: 336–357.

Meznar M, Nigh D. 1995. Buffer or bridge? Environmen-tal and organizational determinants of public affairsactivities in American firms. Academy of ManagementJournal 38: 975–997.

Mizruchi MS. 1992. The Structure of Corporate Politi-cal Action: Interfirm Relationships and Their Conse-quences. Harvard University Press: Cambridge, MA.

Moore RT, Giovinazzo CT. 2011. The distortion gap:policymaking under federalism and interest groupcapture. Publius: Journal of Federalism 42: 1–22.

Oliver C, Holzinger I. 2008. The effectiveness ofstrategic political management: a dynamic capabilitiesframework. Academy of Management Review 33:496–520.

Olson M. 1965. The Logic of Collective Action: PublicGoods and the Theory of Groups . Harvard UniversityPress: Cambridge, MA.

Peltzman S. 1976. Toward a more general theoryof regulation. Journal of Law and Economics 19:211–240.

Rose NL. 1985. The incidence of regulatory rents in themotor carrier industry. RAND Journal of Economics16: 299–318.

Schuler DA, Rehbein K, Cramer RD. 2002. Pursuingstrategic advantage through political means: amultivariate approach. Academy of ManagementJournal 45: 659–672.

Searle S, Casella G, McCulloch C. 1992. VarianceComponents. Wiley: New York.

Shaffer B, Quasney TJ, Grimm CM. 2000. Firm levelperformance implications of non market actions.Business and Society 39: 126–143.

Singer JD. 1998. Using SAS PROC MIXED tofit multilevel models, hierarchical models, andindividual growth models. Journal of Educational andBehavioral Statistics 24: 323–355.

Smith MA. 2000. American Business and PoliticalPower: Public Opinion, Elections, and Democracy .University of Chicago Press: Chicago, IL.

Snijders TAB, Bosker R. 1999. Multilevel Analysis:An Introduction to Basic and Advanced MultilevelModeling. Sage: Thousand Oaks, CA.

Snyder JM Jr. 1992. Long-term investing in politicians;or, give early, give often. Journal of Law andEconomics 35: 15–43.

Stigler G. 1971. The theory of economic regulation. BellJournal of Economics and Management Science 2:3–21.

Stratmann T. 2002. Can special interests buy congres-sional votes? Evidence from financial services legisla-tion. Journal of Law and Economics 45: 345–374.

Useem M. 1984. The Inner Circle: Large Corporationsand the Rise of Business Political Activity in the U.S.and U.K. Oxford University Press: New York.

Vietor R. 1994. Contrived Competition: Regulation andDeregulation in America . Harvard University Press:Cambridge, MA.

Witko C. 2005. Measuring the stringency of statecampaign finance regulation. State Politics & PolicyQuarterly 5: 295–310.

Wooldridge JM. 2002. Econometric Analysis of CrossSection and Panel Data . MIT Press: Cambridge, MA.

Yu F, Yu X. 2011. Corporate lobbying and frauddetection. Journal of Financial and QuantitativeAnalysis 46: 1865–1891.



APPENDIX: FIRST-STAGE REGRESSION RESULTS

Model: dependent variables CPI Cumulative CPI CPI Cumulative CPI

Year (dummies) Included Included Included IncludedLagged market value or

return on salesSig + (lagged

market value)Sig + (lagged

market value)NS (lagged ROS) NS (lagged ROS)

Regulation Sig + Sig + Sig + Sig +Other firms’ CPA NS Sig + Sig + Sig +Firm size Sig + Sig + Sig + Sig +Firm diversification NS NS NS NSVariance explained

(Pseudo R square)0.141 0.150 0.147 0.152

Sig- Significant coefficient, NS- Non-significant coefficient, + positive coefficient.


Copyright of Strategic Management Journal is the property of John Wiley & Sons, Inc. and its content may not

be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written

permission. However, users may print, download, or email articles for individual use.

Documents

S8_In Search of El Dorado