Monday, August 17, 2009

"Corporate Political Contributions and Stock Returns". "The costs of rent-seeking: Evidence from political connections".

Quick and dirty: It pays for corporations to buy politicians. It's only the society at large that suffers.
From the Harvard Law School Forum on Corporate Governance and Regulation:
In our paper Corporate Political Contributions and Stock Returns, which was recently accepted for publication in the Journal of Finance, we study whether there is a robust relation between firm contributions and contributing firm returns. Using data from the U.S. Federal Election Commission (FEC), we create a new and comprehensive database of publicly traded firms’ political action committee (PAC) contributions to political campaigns in the U.S. from 1979 to 2004. After merging the FEC contributions data with CRSP/Compustat data, we have approximately 819,000 contributions made by 1,930 firms over the past twenty five years or so – thus, we have a remarkably rich dataset to test for systematic contribution/return effects arising from publicly traded firms’ involvement in the U.S. political process. Our sample captures over 70% of the total dollar volume of all hard-money corporate contributions and represents on average 60% of the market value-weighted capitalization of all publicly traded firms in the U.S....

...We find that there is an incremental House effect after controlling for the Senate effect, although contributions to both branches of government result in positive economic effects for the contributing firms. Our finding of an incremental effect for firms supporting House candidates may be related to the constitutional provision that revenue and appropriations bills must originate in the House. Thus, firms may find that it is more expedient to support House members, where potential firm value increasing actions may be more suitably created. We also split our sample along political party lines. The FEC data show that Republican candidates typically receive higher total dollar contributions than do Democrats and that Republican candidates’ contributions come from a larger number of supporting firms than do Democrat candidates’ contributions. However, despite the fact that Republicans receive more contributions than Democrats, we find an incremental contribution effect for Democrats after controlling for Republican effect, but do not find an incremental Republican effect after controlling for the Democrat effect.

The full paper is available for download here.

From Vox Eu:

Rent-seeking by politicians and firms likely distorts the allocation of public resources. This column shows that, in Italy, when politicians appointed with the majority coalition are directly involved in the economic activity of private firms, those firms’ profits increase by 5% on average. The increase can be as high 20% in markets highly dependent on public demand, implying a significant welfare loss.

Rent-seeking by politicians and firms may distort the allocation of important public resources such as state-owned banks’ finance (Khwaja and Mian 2005), government bailouts (Faccio, McConnell and Masulis 2006) procurement contracts (Goldman, Rocholl and So 2007) and natural resources (Aaronson 2008). This is perceived to be a serious problem in many countries, especially during periods of economic crisis, as resources are scarcer and competition for them becomes stiffer (Johnson and Mitton 2003). However, evaluating the actual extent of the misallocation implied by rent-seeking activities is extremely difficult because such practices are often illegal and therefore remain hidden from official statistics.

At the same time, connections between private firms and the public administration are in many instances tolerated by the law. For example, in several countries (including the US) private companies contribute massively to electoral campaigns. Restricting the attention to those cases in which the relationship between the politician and the firm is known, we can identify rent-seeking and quantify the social cost it imposes on the rest of the economy.1

One such case occurs when politicians are directly involved in the economic activity of private firms. In recent work (Cingano and Pinotti, 2009), we merged administrative registries of Italian local politicians and national social security archives to identify this type of connections in a panel of about 1200 Italian manufacturing firms during the period 1985-1997.

The system of local governments in Italy comprises about 8000 municipalities, 100 provinces, and 20 regions. During our sample period, about 300,000 individuals were appointed in local governments, controlling directly about one-third of the total public budget (and retaining much discretionary power over the allocation of the remaining part). Unlike members of the national parliament, most local administrators maintain a stable occupation alongside their political career, so we could track 11,000 of them in our sample of firms (out of 1.5 million employees). In particular, about half of the firms experienced a change in connection status during our sample period, allowing us to exploit longitudinal variation to identify the impact on firm performance.

Figure 1 shows that profits experience a significant increase (about 5% on average) right after a firm becomes connected and an analogous decrease when the connection expires. This result is in line with the positive premium attached by financial markets to the stock price of connected firms (e.g. Faccio, 2006)....MORE

From: " Is Talk Cheap?: Buying Congressional Testimony with Campaign Contributions*":

“A Statesman is the animal who works with phrases instead of with the burglar’s jimmy.”

“Why form a party when you can as well form a pressure group?”

“Politicians are like bad horsemen who are so preoccupied with keeping in the saddle that they can’t bother
about where they go.”

--Some of Joseph A. Shumpeter’s aphorisms drawn from Swedberg (1991).
Abstract: For the steel import quota bill of 1999, our answer to the question posed in the
title is that each word in the Congressional Record costs $39 in campaign contributions
from the steel industry. Consequently, our answer is “Yes.”