All the President’s Friends: Political Access and Firm Value

Jeffrey R. Brown is Josef and Margot Lakonishok Professor of Business and Dean of the College of Business and Jiekun Huang is an associate professor of finance and Vernon Zimmerman Faculty Fellow at the University of Illinois at Urbana-Champaign Gies College of Business. This post is based on their recent paper, forthcoming in the Journal of Financial Economics.

Access to political decision-makers is a scarce resource because politicians and their aides have limited time and can only interact with a limited set of people. Gaining political access can be of significant value for corporations, particularly because governments play an increasingly prominent role in influencing firms. Governments affect economic activities not only through regulations but also by playing the role of customers, financiers, and partners of firms in the private sector. There is ample anecdotal evidence suggesting that firms benefit from gaining access to powerful politicians. For example, a Wall Street Journal (2015) article claims that Google executives’ frequent visits to the White House were instrumental in the Federal Trade Commission’s decision to drop its antitrust investigation of the company. Gaining and maintaining access to influential policymakers can be an important source of competitive advantage for companies. Yet despite the importance of political access for firms, the allocation of political access across firms and its effects on firm value remains underexplored.

In our paper, All the President’s Friends: Political Access and Firm Value, published in the Journal of Financial Economics, we investigate the characteristics of firms with political access as well as the valuation effects of political access for corporations. Using a data set of White House visitor logs, we identify top corporate executives of S&P 1500 firms that have face-to-face meetings with high-level federal government officials. We examine two fundamental questions associated with political access. First, how prevalent is political access—in the literal form of meetings with influential policymakers—and what are the characteristics of firms with access to politicians? Second, does political access increase firm value, and if so, through what channels?

We identify 2,401 meetings between corporate executives of S&P1500 firms and federal government officials at the White House during 2009 through 2015. Our findings can be summarized as follows. First, in terms of the prevalence and characteristics of firms with political access, we find that about 11% of the firm-years have executives who visit the White House. Because firms with political access tend to be larger, these firm-years account for about 40% of the total market capitalization of all firm-years in the sample. Consistent with the notion that campaign contributions “buy” access, we find that firms that contributed more to Obama’s presidential election campaigns are more likely to have access to the White House. We also find that firms that spend more on lobbying, firms that receive more government contracts, larger firms, and firms with a greater market share are more likely to have access to influential federal officials.

Second, we find that corporate executives’ meetings with White House officials are followed by significant positive cumulative abnormal returns (CARs). For example, the CAR is about 0.38% during a 12-day window surrounding the meetings (i.e., one day before to ten days after the meetings). We find that this result is driven mainly by closely connected firms, defined as those that contributed more to Obama’s presidential campaign than his opponent’s. For instance, visits by close firms’ executives are associated with a 12-day CAR of 0.51%, as compared to 0.27% for those by nonclose firms’ executives. Moreover, we find significant positive CARs around the release of the visitor logs, especially for visits that were not covered in the media before the release of the logs. These results suggest that White House visits are associated with significant benefits for firms.

Third, to further examine the valuation effects associated with political access, we exploit the election of Donald J. Trump as the 45th president of the US as a shock to political access. We find that firms with access to the Obama administration experience significantly lower stock returns following the release of the election result than otherwise similar firms. The economic magnitude is nontrivial as well: after controlling for various factors that are likely correlated with firms’ political activities, such as campaign contributions, lobbying expenses, and government contracts, the stocks of firms with access to the Obama administration underperform the stocks of otherwise similar firms by about 0.70% in the three days immediately following the election. This result corroborates our main finding that political access is of significant value to firms. We also find that the negative CAR around the 2016 presidential election for firms with access to the Obama White House is driven primarily by close firms, suggesting that political access enables firms that are supportive of the president to reap significant benefits.

Last, we identify two channels through which political access enhances firm value. Using a propensity score matched sample of firms with political access (treatment firms) and those without (control firms) and a difference-in-differences approach, we find that treatment firms, relative to control firms, receive more government contracts following the meetings than before the meetings. We also find evidence suggesting that treatment firms, relative to control firms, secure more favorable regulatory actions following the meetings than before the meetings.

The main contribution of our paper to the literature is two-fold. First, we are the first to use the data on White House visitors to identify physical interactions between corporate executives and influential politicians. The detailed information in the visitor log data enables us to provide a direct measure of political access and to provide evidence on the allocation and valuation effects of political access. The data also permit the identification of the exact timing of corporate executives’ access to powerful politicians, thereby allowing us to measure the valuation effects using an event study approach. Second, our study adds to the understanding of the value of political connections to executive branch officials in the US. Because corporations are often directly affected by decisions made by executive branch agencies (e.g., the allocation of government procurement contracts and regulatory enforcement decisions), it is important to understand the value of ties to politicians in the executive branch and the channels through which such a valuation effect occurs. The evidence in our paper suggests that access to high-level officials in the executive branch can be an important source of competitive advantage for firms. Our results also illuminate two channels, i.e., government procurement contracts and regulatory relief, through which political access affects firm value.

The complete paper is available for download here.

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