Valuing Changes in Political Networks: Evidence from Campaign Contributions to Close Congressional Elections

Abstract

This paper investigates the value of firm political connections to US congressional candidates using a regression discontinuity design. In a sample of close special elections occurring at times unrelated to firm-specific economic events or broader political events, I compare the abnormal returns of firms that contributed to winning candidates to those of firms that contributed to losing candidates. I find the wedge between these firms to be 1.7% to 6.8% of firm equity value. To assess which areas of policy matter most, I test which congressional committee assignment seats are the most valuable. In particular, the loss of a connection to the Senate Appropriations committee leads to a loss of $1.9 billion in sales in the following year. Finally, I examine additional actions that firms take to develop political networks — directly hiring former government employees and engaging professional lobbyists — and find that these actions complement their contribution strategies.

Keywords: Political Connections, Politics and Finance, Campaign Finance, Corporate Finance, Regression Discontinuity

JEL Classification: G38