Do Powerful Politicians Really Cause Corporate Downsizing?

Abstract

Cohen, Coval and Malloy (2011) suggested that increased government spending crowded out private corporate investment by publicly-traded corporations, as identified by changes in Congressional chairmanships. Our paper shows that this was incorrect. The magnitude of their reported crowding-out is implausibly large. Instead, their inference was due to an omitted variable. The Chairmanship of Texas Senator Lloyd Bentsen from 1987 to 1992 followed a large decline in oil prices from 1980 to 1986. Similar investment reductions also occurred contemporaneously in oil firms and oil states beyond Texas. Our paper also discusses other issues, such as standard-error clustering, Senate coding choices, and temporal alignment diagnostics, which carry even more importance in their other regressions. The answer to the question in the title is that there is no evidence that powerful politicians caused corporate downsizing.