The Synergistic Financial Effect of Corporate Political Activities: The Case of Listed Canadian Companies

Saidatou Dicko

doi:10.5539/ibr.v14n1p102

Abstract

Corporate political activities can bring genuine political capital to firms and are an effective way to access key resources to boost financial capital and maximize profits. These activities fall into three categories: coopting ex-politicians to decision-making bodies (board of directors and top management) to benefit from their social capital; lobbying to directly influence public policy; and making financial contributions to the activities of political parties and committees. This study asks the following question: what is the combined effect of two of these activities (political connections and lobbying) on the financial and accounting indicators of Canadian listed companies? We argue that engaging in corporate political activities allows firms to accumulate a type of political capital that we define as the sum of all political activities conducted by an individual company. To perform our research, we analyzed Canadian companies listed on the S&amp;P/TSX composite index from 2012 through 2016. Results show that firms with this type of political capital are generally in a better financial position than those without it. A significant correlation was found between a firm&rsquo;s political capital and its main sources of financing (equity and long-term debt) as well as with its ROE. Political capital has more positive impacts on key firm financial indicators than does each type of political activity on its own (synergistic effect).

Highlights

It is widely accepted that the political and business worlds are becoming increasingly intertwined and that politicians of every stripe are in favour of pro-business measures in the name of job creation
This study asks the following question: what is the combined effect of two of these activities on the financial and accounting indicators of Canadian listed companies? We argue that engaging in corporate political activities allows firms to accumulate a type of political capital that we define as the sum of all political activities conducted by an individual company
When the firm uses both types of political capital, there is a positive and significant correlation with the main variables that measure the firm’s financing sources and financial performance, i.e. equity, long-term debt, market value, revenues and ROE

Summary

Introduction

It is widely accepted that the political and business worlds are becoming increasingly intertwined and that politicians of every stripe are in favour of pro-business measures in the name of job creation. Breton and Pesqueux (2006) argue that companies influence society because they affect its representatives (politicians), especially by the funding they provide and the control they acquire over public regulations and policies. The financial dependence of politicians on companies is increasingly enhancing the control that the latter exercise over them. To exercise this political control, companies are resolutely engaged in numerous political activities that make it possible for them to accrue the real political capital necessary to their success and accomplishments. The literature has identified three main corporate political activities: nomination of ex-politicians to the board of directors or top management (political connections); lobbying; and funding political parties and committees

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