The Value of (Corrupt) Lobbying

39 Pages Posted: 19 Mar 2011 Last revised: 23 Mar 2018

See all articles by Alexander Borisov

Alexander Borisov

University of Cincinnati - Department of Finance - Real Estate

Eitan Goldman

Indiana University - Kelley School of Business - Department of Finance

Nandini Gupta

Indiana University - Kelley School of Business - Department of Finance

Date Written: November 15, 2011

Abstract

Does corporate lobbying simply add value by allowing firms to communicate expert information to policy makers, or does it also add value by facilitating potentially illegal quid pro quo arrangements, where lawmakers receive private benefits in exchange for favorable policy decisions? Using the corruption scandal involving the top Washington D.C. lobbyist Jack Abramoff as an exogenous negative shock to the ability of firms to lobby, we examine whether lobbying and illegal lobbying practices in particular, affect the market value of firms. The results suggest that firms that lobby more experience a significant decrease in market value following the guilty plea by Mr. Abramoff to bribery and corruption. A firm that spent $100,000 more on lobbying prior to the event year experiences an average decrease of $1.4 million in value in a 3-day event window around the guilty plea. To examine whether lobbying adds value by corrupting policy makers, we use corporate social responsibility reputation rankings to capture a firm’s propensity to engage in corrupt practices, and find that lobbying related losses are larger for firms with a poor reputation for social responsibility. We also find that follow-up legislation aimed at curbing corrupt lobbying practices significantly reduces the value of firms that lobby. For example, a firm that spent $100,000 more on lobbying prior to the event year, experiences an average decrease of $0.84 million in value in a 3-day event window around the passage of the anti-corruption law. We find that the negative association between lobbying and firm value around these events occurs for all firms that lobby regardless of their connections to either political party. Our results indicate that lobbying creates shareholder value, and that part of this value can be attributed to corrupt lobbying practices.

Keywords: Politics, Lobbying, Corporate Governance, Corruption, Financial Regulation

JEL Classification: G14, G18, G30, G34, G38

Suggested Citation

Borisov, Alexander and Goldman, Eitan and Gupta, Nandini, The Value of (Corrupt) Lobbying (November 15, 2011). Available at SSRN: https://ssrn.com/abstract=1786744 or http://dx.doi.org/10.2139/ssrn.1786744

Alexander Borisov

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States

Eitan Goldman

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-856-0749 (Phone)

Nandini Gupta (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3416 (Phone)
812-855-5875 (Fax)

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