Political Contributions and Corporate Value

Abstract

Do political connections truly benefit firms? Can firms create values from such connections? This study seeks to answer these questions by conceptualizing political connections that firms form with the government via Political Action Committee (PAC) contributions as social capital built for future benefits. We propose that building such social capital is likely to help firms not only attain more favorable treatments from the government, but also, more importantly, appeal themselves to investors in the market, especially when the investment uncertainty is high because of government intervention or the launching of new rules and regulations. We rely on the 2008 credit crunch in the United States as our research context and investigate the impact of political connections via PAC contributions on the stock market reactions toward three news announcements; these news items were informative regarding whether the U.S. government is a positive or negative force toward rescuing troubled financial institutions. As the sudden credit crunch makes investors be more attentive to political connections as a meaningful cue to infer the bailout possibility, we find strong support that the stock market reacts more positively for those financial institutions with political connections via PAC contributions than those without such connections in the case of positive news announcements. However, the stock market reacts more negatively in response to those with political connections in the case of negative news announcements.