Two Essays about Corporate Political Connections

關於公司政治關聯的兩篇論文

Student thesis: Doctoral Thesis

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Award date1 Jun 2021

Abstract

This dissertation is composed of two essays. Both are focused on corporate political connections. Instead of studying the effect of political connections on individual firms, I try to explore the effect of political connections on the whole economy by studying its externalities along different economic links. One studies the externalities of political connections along the supply chains, the other studies the externalities of political connections in the product market.

The first essay explores the effect of customers' political connections on suppliers. Research has shown that firms can build political connections through campaign contributions and gain by supporting winning candidates. This beneficial effect of political connections could travel upward along the supply chain and benefit their suppliers by increasing the magnitude and stability of demand faced by suppliers. On the contrary, it could be a curse for suppliers as connected customers now have higher bargaining power. Using U.S. close election outcomes as shocks to firms' political connections, I find that this boon for connected firms is ruinous for their suppliers. The more the supplier depends on politically connected customers, the more adverse its stock market reaction is around customers' winning of political connections. The effects are stronger for suppliers without political connections themselves and with less bargaining power ex-ante. Further, I find that customers manage their supply chain relationships more actively after winning political connections and ensure a less concentrated upstream supplier base. Consequently, suppliers experience worse trading terms, lower profitability and firm values. Overall, political connections increase beneficiary customers' bargaining power to the detriment of their suppliers.

The second essay investigates the externalities of corporate political connections in the product market. On the one hand, political connections could have negative externalities if they are used by firms to gain competitive advantages at the expense of rivals. On the other hand, political connections may also have positive externalities if used by firms to obtain benefits that could have ripple effects on peers in the industry. Using U.S. close congressional election results as shocks to firms' political connections, I find that firms tend to react positively when their rivals receive political connection shocks. These effects are stronger when firms do not experience political connection shocks themselves, when the benefits are more easily transferred between firms, and when the predatory risks and survival concerns are low. Further, I observe that firms benefit from rivals' political connections through sales redistribution and favorable regulation. It suggests that, on average, political connections have positive externalities in the product market.