Investing in Tax Breaks: Assessing the Outcomes of Political Strategy Choices

Abstract:     
This study examines the interaction of two corporate political tactics, campaign financing activity and lobbying. Following prior literature, we consider campaign financing activity (PAC contributions) as an investment in access and differentiate this activity from lobbying, which we consider a more direct attempt to influence policy. We examine the role of both political tactics and their potentially complementary relationship in a tax setting, and find that investing in access to candidates appears to enhance attempts to influence policy and is associated with lower levels of future cash ETRs. We then investigate a second potential benefit of campaign financing activity, more sustainable tax savings over time. Prior management literature suggests that firms choose from a menu of political strategies, and that the most proactive firms, those that invest in continued exchanges with policymakers, should experience reduced variability in outcomes over time (Hillman and Hitt 1999). We demonstrate that the most politically active firms across both dimensions of access and tax-specific influence also enjoy lower variability in cash ETR.

Number of Pages in PDF File: 56

working papers series