Does a Firm's Political Capital Affect Its Investment and Innovation?
52 Pages Posted: 22 May 2017 Last revised: 3 Aug 2018
Date Written: July 2018
This paper shows that political capital is an important determinant of corporate investment and innovation. Using unexpected exits of legislators from the U.S. Congress, I find that a firm that suddenly loses political capital increases capital investment and R&D spending. Surprise losses of political capital result in negative announcement returns, reduced profitability, and reduced sales to the government. The competitors of a firm that loses political capital show positive announcement returns on the exit event. The results suggest that there is an industry equilibrium in which political capital can be used to enhance barriers to entry and first-mover advantage.
Keywords: Investment, R&D, Corporate Governance, Political Connections, Product Market
JEL Classification: G14, G31, G38, O3
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