Guilty by Political Association: The Impact of Political Scandals on Connected Firms

Abstract

Using a sample of scandals involving US congresspersons, we investigate the spillover from the scandal-tainted congresspersons to firms connected to them through PAC contributions. Following the first media report of a scandal, firms connected to the scandal-tainted congresspersons experience a relative loss in market value and in future operating and financing opportunities. The effects are more pronounced if the congressperson does not resign prior to the next election. Our findings indicate that a potential cost of political connections is the loss that occurs when a congressperson to whom a firm is connected is caught up in a scandal.

Keywords: Political Scandal, Political Connection, Spillover, Firm Valuation

JEL Classification: G14; G30