The effects of firm political contributions on earmarks and subsequent firm performance

Abstract

With the reintroduction of hard earmarks in the United States, it is essential to understand the factors that drive the receipt of earmarks. Earmarks represent a significant source of revenue for many firms. We examine the relationship between political expenditures, federal earmarks, and subsequent firm performance. Using a sample of earmarks from appropriations bills, we demonstrate that firm-affiliated political action committee (PAC) contributions to legislators predict the size and number of earmarks directed to these companies. We also show that PAC contributions to a legislator increase the probability of the legislator writing an earmark benefiting the firm, with an average return of 1090%. Earmarks are associated with greater future profitability, but politically connected earmark recipients exhibit poorer financial performance. Our findings indicate a clear channel through which firms receive value from the US federal government.