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 loss in market value and in operating and financing prospects. The effects are more pronounced if the congressperson does not resign following the first media report of the scandal. Our findings indicate that a potential cost of political connections is the loss that occurs when a congressperson to whom the firm is connected is caught up in a scandal.

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

JEL Classification: G14; G30