Corporate Lobbying and CEO Pay

Abstract

This study examines the agency costs of corporate lobbying by exploring the relation between lobbying and excess CEO compensation. We show that CEOs of firms engaged in lobbying earn significantly greater compensation levels compared to CEOs in non-lobbying firms, after controlling for standard economic determinants of pay. The relation between lobbying and CEO pay increases with the intensity of firms’ lobbying. Although lobbying is positively associated future sales growth, we find no evidence suggesting it culminates in shareholder wealth creation. Additional tests reveal that for a subset of firms with available data, governance attributes mediate the relation between lobbying and firms’ decision to lobby. Lastly, a difference-in-difference, propensity-score matched analysis suggests significant increases in CEO pay levels around firms’ initial lobbying engagements. Overall, we conclude that corporate lobbying introduces agency costs borne by shareholders.

Keywords: Lobbying, CEO Compensation, Agency Costs, Corporate Governance

JEL Classification: G30, G32, G34